Self-Regulatory Organizations; Depository Trust Company; Notice of Filing Amendment Nos. 1 and 2 and Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To Specify Procedures Available to Issuers of Securities Deposited at DTC for Book Entry Services When DTC Imposes or Intends To Impose Restrictions on the Further Deposit and/or Book Entry Transfer of Those Securities, 16392-16401 [2014-06459]

Download as PDF 16392 Federal Register / Vol. 79, No. 57 / Tuesday, March 25, 2014 / Notices C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the proposed rule change does not (i) significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act 40 and Rule 19b–4(f)(6) thereunder.41 The Exchange has asked the Commission to waive the 30-day operative delay so that the proposal may become operative immediately upon filing. The Exchange stated that waiver of this requirement will allow the Exchange to compete with other options exchanges that have expanded their STOS Programs without putting the Exchange at a competitive disadvantage. The Exchange also stated that the proposal would help eliminate investor confusion and promote competition among the options exchanges. For these reasons, the Commission believes that the proposed rule change presents no novel issues and that waiver of the 30day operative delay is consistent with the protection of investors and the public interest; and will allow the Exchange to remain competitive with other exchanges. Therefore, the Commission designates the proposed rule change to be operative upon filing.42 At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of 40 15 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). As required under Rule 19b–4(f)(6)(iii), the Exchange provided the Commission with written notice of its intent to file the proposed rule change, along with a brief description and the text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. 42 For purposes only of waiving the 30-day operative delay, the Commission has also considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). emcdonald on DSK67QTVN1PROD with NOTICES 41 17 VerDate Mar<15>2010 18:16 Mar 24, 2014 Jkt 232001 the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.43 Kevin M. O’Neill, Deputy Secretary. IV. Solicitation of Comments [FR Doc. 2014–06462 Filed 3–24–14; 8:45 am] BILLING CODE 8011–01–P Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– NYSEMKT–2014–20 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NYSEMKT–2014–20. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR– NYSEMKT–2014–20 and should be submitted on or before April 15, 2014. PO 00000 Frm 00117 Fmt 4703 Sfmt 4703 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–71745; File No. SR–DTC– 2013–11] Self-Regulatory Organizations; Depository Trust Company; Notice of Filing Amendment Nos. 1 and 2 and Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To Specify Procedures Available to Issuers of Securities Deposited at DTC for Book Entry Services When DTC Imposes or Intends To Impose Restrictions on the Further Deposit and/or Book Entry Transfer of Those Securities March 19, 2014. On December 5, 2013, The Depository Trust Company (‘‘DTC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) proposed rule change SR–DTC–2013–11 (‘‘Proposed Rules’’) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’) 1 and Rule 19b–4 thereunder.2 The Proposed Rules were published in the Federal Register on December 24, 2013.3 The Commission received nine comments from seven commenters to the Proposed Rules and two letters from DTC responding to those comments.4 On February 10, 2014, DTC filed Amendment No. 1 to the Proposed Rules. On March 10, 2014, 43 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Release No. 34–71132 (Dec. 18, 2013); 78 FR 77755 (Dec. 24, 2013). 4 See Letters to Elizabeth M. Murphy, Secretary, Commission from: Suzanne H. Shatto dated December 20, 2013 (‘‘Shatto Letter’’); Simon Kogan dated December 22, 2013 (‘‘Kogan Letter’’); DTCC BigBake dated December 27, 2013 (‘‘DTCC BigBake Letter I’’) and March 14, 2014 (‘‘DTCC BigBake Letter II’’); Brenda Hamilton, Hamilton & Associates Law Group, PA (‘‘Hamilton Letter’’); Charles V. Rossi, Chairman, STA Board Advisory Committee, Securities Transfer Association dated January 14, 2014 (‘‘STA Letter’’); Louis A Brillemen, Louise A. Brilleman, P.C. dated January 14, 2014 (‘‘Brilleman Letter’’); Gary Emmanuel and Harvey Kesner, Sichenzia Ross Friedman Ference LLP dated January 14, 2014 (‘‘Sichenzia Letter I’’) and February 24, 2014 (‘‘Sichenzia Letter II’’); and Isaac Montal, Managing Director and Deputy General Counsel, DTCC dated February 10, 2014 (‘‘DTC Letter I’’) and March 3, 2014 (‘‘DTC Letter II’’). 1 15 E:\FR\FM\25MRN1.SGM 25MRN1 Federal Register / Vol. 79, No. 57 / Tuesday, March 25, 2014 / Notices DTC filed Amendment No. 2 to the Proposed Rules. The Commission is publishing this notice and order to solicit comments on Amendment Nos. 1 and 2 from interested persons and to institute proceedings under Section 19(b)(2)(B) of the Exchange Act 5 to determine whether to approve or disapprove the Proposed Rules. The institution of proceedings does not indicate that the Commission has reached any conclusions with respect to any of the issues involved, nor does it mean that the Commission will ultimately disapprove the Proposed Rules. Rather, the Commission seeks and encourages interested persons to provide additional comment on the Proposed Rules to inform the Commission’s analysis of whether to approve or disapprove the Proposed Rules. I. Background The Proposed Rules specify procedures available to issuers of securities deposited at DTC when DTC blocks or intends to block the deposit of additional securities of a particular issue (‘‘Deposit Chill’’) 6 or prevents or intends to prevent deposits and restrict book-entry and related depository services of a particular issue (‘‘Global Lock’’). A. International Power DTC filed the Proposed Rules in response to the Commission’s opinion in In the Matter of International Power Group, Ltd. (‘‘International Power’’).7 In International Power, the Commission held that issuers were entitled to ‘‘fair procedures’’ under Section 17A(b)(3)(H) when a clearing agency restricts or denies them access to services.8 In addition, the Commission stated that it believes ‘‘DTC should adopt procedures that accord with the fairness requirements of Section 17A(b)(3)(H), which may be applied uniformly in any future such issuer cases.’’ 9 Those procedures must also comply with Section 17A(b)(5)(B) of the Exchange Act, which requires clearing agencies when prohibiting or limiting a person’s access to services, to (1) notify such 5 15 U.S.C. 78s(b)(2)(B). subject to a Deposit Chill remain eligible for book-entry transfer at DTC. 7 Int’l Power Group, Ltd., Securities Exchange Act Rel. No. 66611 (Mar. 15, 2012), 2012 SEC LEXIS 844. 8 Int’l Power, 2012 SEC LEXIS 844, at *16. The Commission also held that the Commission has jurisdiction under Section 19(f) of the Exchange Act to review an issuer’s appeal of a suspension or limitation on access to a clearing agency’s services. The Commission remanded the case to DTC to provide fair procedures. 9 Int’l Power, 2012 SEC LEXIS 844, at *32. emcdonald on DSK67QTVN1PROD with NOTICES 6 Securities VerDate Mar<15>2010 18:16 Mar 24, 2014 Jkt 232001 person of the specific grounds for the prohibition or limitation, (2) give the person an opportunity to be heard upon the specific grounds for the prohibition or limitation, and (3) keep a record.10 However, the Commission also acknowledged a clearing agency’s need to act to avert ‘‘imminent harm.’’ 11 The Commission stated a clearing agency may justifiably impose a suspension of services in advance of providing the issuer with notice and an opportunity to be heard.12 In such circumstances, a clearing agency’s procedures ‘‘should balance the identifiable need for emergency action with the issuer’s right to fair procedures’’ and any suspension could not be maintained ‘‘indefinitely without providing expedited fair process to the affected issuer.’’ 13 B. DTC’s Role Under Section 17A of the Exchange Act DTC is the nation’s central securities depository, registered as a clearing agency under Section 17A of the Exchange Act.14 DTC performs services and maintains securities accounts for its participants, primarily banks and broker dealers (‘‘Participants’’).15 Participants may present a security 16 to be made eligible for DTC’s depository and bookentry services. If DTC accepts the security as eligible for those services and the security is deposited with DTC for credit to the securities account of a Participant, it becomes an ‘‘Eligible Security.’’ 17 Thereafter, other 10 Int’l Power, 2012 SEC LEXIS 844, at *24. Power, 2012 SEC LEXIS 844, at *29. 12 Int’l Power, 2012 SEC LEXIS 844, at *29. 13 Int’l Power, 2012 SEC LEXIS 844, at *29. 14 See Securities Exchange Act Release No. 20221 (Sept. 23, 1983), 48 FR 45167 (Oct. 3, 1983). 15 See 15 U.S.C. 78c(a)(24). 16 ‘‘Security’’ is defined in DTC’s rules as follows: The term ‘‘Security’’ has the meaning given to the term ‘‘financial asset’’ in Section 8–102 of the [Uniform Commercial Code of New York]. Any item credited to an Account (by the act of being credited to the Account) shall be deemed a Security under these Rules and shall be treated as a financial asset under Article 8 of the [Uniform Commercial Code of New York]. A Security may be an Eligible Security, a Deposited Security, a Pledged Security, a Segregated Security or an MMI Security, or some or all of them collectively, as the context may require. The term ‘‘Security’’ shall not include Preferred Stock. See DTC Rule 1. 17 Eligible Security is defined in DTC’s rules as ‘‘a Security accepted by the Corporation, in its sole discretion, as an Eligible Security. The Corporation shall accept a Security as an Eligible Security only (a) upon a determination by the Corporation that it has the operational capability and can obtain information regarding the Security necessary to permit it to provide its services to Participants and Pledgees when such Security is Deposited and (b) upon such inquiry, or based upon such criteria, as the Corporation may, in its sole discretion, determine from time to time. The timing of additions of such issues shall be on a nondiscriminatory basis consistent with the Corporation’s objective to provide the maximum 11 Int’l PO 00000 Frm 00118 Fmt 4703 Sfmt 4703 16393 Participants may deposit that Eligible Security into their respective DTC accounts. Once the Eligible Security is credited to the account of one or more Participants, interests in that Eligible Security may be transferred among Participants by book-entry in accordance with the DTC Rules and Procedures. As provided in the DTC Rules and Procedures, DTC processes the transfer of interests in Eligible Securities among DTC Participants by credits and debits to Participant accounts in accordance with the instructions of delivering and receiving Participants who are parties to the transaction. DTC Participants agree to be bound by DTC’s Rules and Procedures as a condition of membership. To facilitate book-entry transfer and other services that DTC provides for its Participants with respect to Deposited Securities,18 Eligible Securities are registered on the books of the issuer (typically, in a register maintained by a transfer agent) in DTC’s nominee name, Cede & Co. DTC maintains Eligible Securities of an issue in fungible bulk so that each Participant with an interest in the security has a pro rata interest in DTC’s entire inventory of that issue, but none of the securities on deposit is identifiable to or owned by any particular Participant.19 DTC’s deposit and book-entry transfer services facilitate the operation of the nation’s securities markets. By serving as registered holder of trillions of dollars of securities, DTC processes the enormous volume of daily securities transactions by the book-entry movement without the need to transfer physical certificates. C. DTC Eligibility Standards DTC’s Rules and Procedures authorize DTC to determine whether to accept a security as an Eligible Security and when an Eligible Security will cease to be such.20 They also provide that DTC ‘‘may limit certain services to particular practical degree of service in facilitating the prompt and orderly settlement of Securities transactions.’’ See DTC Rule 1 and DTC Rule 5, Section 1. 18 Deposited Security is defined in DTC’s rules as ‘‘an Eligible Security credited to the Account of a Participant by Deposit or Delivery. A Deposited Security shall cease to be such if it becomes a Pledged Security or is Withdrawn.’’ See DTC Rule 1. 19 See Securities Exchange Act Release No. 19678 (Apr. 15, 1983), 48 FR 17603, 17605, n.5 (Apr. 25, 1983) (describing fungible bulk); see also N.Y. Uniform Commercial Code, § 8–503, Off. Cmt 1 (‘‘. . . all entitlement holders have a pro rata interest in whatever positions in that financial asset the [financial] intermediary holds’’). 20 See DTC Rule 5. E:\FR\FM\25MRN1.SGM 25MRN1 16394 Federal Register / Vol. 79, No. 57 / Tuesday, March 25, 2014 / Notices issues of Eligible Securities.’’ 21 The standards for determining whether a security is an Eligible Security are as follows: 22 Generally, the issues that may be made eligible for DTC’s book-entry delivery, settlement and depository services are those that have been issued in a transaction that: (i) Has been registered with the Commission pursuant to the Securities Act of 1933 (‘‘Securities Act’’); (ii) was exempt from registration pursuant to a Securities Act exemption that does not involve (or, at the time of the request for eligibility no longer involves) transfer or ownership restrictions; or (iii) permits resale of the securities pursuant to Rule 144A or Regulation S and in all cases such securities otherwise meet DTC’s eligibility criteria. Thus, an essential element of DTC eligibility is that the securities are ‘‘freely tradeable’’ or, if restricted by Rule 144A 23 or Regulation S under the Securities Act, are processed through a separate program in which Participants acknowledge and agree to comply with the applicable restrictions. In determining whether deposited securities satisfy DTC’s eligibility requirements, DTC may require an issuer to provide an opinion from outside counsel in order ‘‘to substantiate the legal basis for eligibility.’’ 24 DTC also reserves the right to require an opinion of counsel in support of eligibility requirements ‘‘to protect DTC and its Participants from risk.’’ 25 II. Description of the Proposed Rules A. Proposed Rule 22(A): Deposit Chills 1. Scope of Proposed Rule 22(A) Proposed Rule 22(A) sets forth procedures available to issuers of Eligible Securities where DTC detects unusually large volumes of deposits of a low priced or thinly traded Eligible Security and, as a result, determines to impose or intends to impose a Deposit Chill.26 The procedures will also apply if DTC imposes or intends to impose a Deposit Chill pursuant to its obligations under the Securities Act of 1933 21 See emcdonald on DSK67QTVN1PROD with NOTICES 22 See DTC Rule 6. DTC’s Operational Arrangements, Section I.A.2. 23 17 CFR 230.144A. 24 The Operational Arrangements further specify that such counsel must be ‘‘an experienced securities practitioner, licensed to practice law in the relevant jurisdiction and in good standing in any bar to which such practitioner is admitted. See DTC Operational Arrangements Section I.B.2. Such counsel must be engaged in an independent private practice (i.e., not in-house counsel) and may not have a beneficial ownership interest in the security for which the opinion is being provided or be an officer, director or employee of the Issuer.’’ See DTC Operational Arrangements Section I.A.1. 25 Id. 26 See Proposed Rule 22(A)(1). VerDate Mar<15>2010 18:16 Mar 24, 2014 Jkt 232001 (‘‘Securities Act’’), the Bank Secrecy Act (‘‘BSA’’) or any rules, regulations, or guidance promulgated under the BSA, including rules or regulations that the Office of Foreign Asset Control promulgates.27 However, Proposed Rule 22(A) will not apply when DTC ‘‘impose[s] operational restrictions on deposits or other services in connection with ordinary course of business processing of Eligible Securities.’’ 28 One example of ‘‘ordinary course of business processing’’ is the processing of corporate actions, including name changes and stock splits. It will also not apply to other restrictions in DTC’s Procedures 29 that do not constitute a Deposit Chill for purposes of Proposed Rule 22(A). 2. Deposit Chill Notice DTC will send notice of the Deposit Chill (‘‘Deposit Chill Notice’’) to an issuer: • No later than twenty Business Days 30 prior to the imposition of the Deposit Chill or; • No later than three Business Days after imposition of the Deposit Chill in the event DTC must first impose the Deposit Chill: Æ ‘‘in order to prevent imminent harm, injury or other such consequences to [DTC] or its Participants;’’ or Æ if DTC ‘‘reasonably determines that such action is necessary to protect the prompt and accurate clearance and settlement of securities transactions through [DTC].’’ 31 The Deposit Chill Notice will inform the issuer of the reasons for DTC’s actions, including the legal authority upon which DTC relies to impose the Deposit Chill.32 It will also provide the date the Deposit Chill was imposed or the date it will be imposed, should the issuer fail to respond to the Deposit Chill Notice.33 3. Deposit Chill Response If the issuer elects to contest the Deposit Chill, it may submit a response (‘‘Deposit Chill Response’’) in the form and containing the substance provided in the Deposit Chill Notice.34 If the 27 Proposed Rule 22(A)(3)(b)(iii). Rule 22(A)((3)(b)(2). 29 ‘‘Procedures’’ means the ‘‘Procedures, service guides, and regulations of the Corporation adopted pursuant to Rule 27, as amended from time to time.’’ See DTC Rule 1. In its filing with the Commission, DTC proposed to amend this definition to include ‘‘operational arrangements.’’ 30 ‘‘Business Days’’ means any day on which DTC is open for business. See DTC Rule 1. 31 Proposed Rule 22(A)(2). 32 Proposed Rule 22(A)(2)(a)(i). 33 Id. 34 Proposed Rule 22(A)(2)(a)(ii). 28 Proposed PO 00000 Frm 00119 Fmt 4703 Sfmt 4703 issuer demonstrates to DTC’s ‘‘reasonable satisfaction’’ that the issue complies with DTC’s eligibility requirements and the applicable Procedures,35 the Deposit Chill will be lifted or will not be imposed. DTC must receive the Deposit Chill Response within twenty Business Days after the date of the Deposit Chill Notice. However, DTC may extend this deadline for up to an additional twenty Business Days if the issuer establishes ‘‘good cause.’’ 36 The Deposit Chill Response must include a legal opinion (‘‘Legal Opinion’’) from ‘‘an independent securities counsel retained by the issuer and reasonably acceptable’’ to DTC.37 The Legal Opinion must establish that the security at issue meets DTC’s eligibility requirements by showing either that the securities (i) are not restricted securities under SEC Rule 144(a)(3),38 or (ii) are exempt from any restrictions on transferability under the Securities Act.39 The Legal Opinion must be satisfactory to DTC, but DTC will not ‘‘unreasonably withhold its acceptance’’ if the Legal Opinion ‘‘includes the material contents of the Template.’’ 40 4. Request for Additional Information Upon receiving the Deposit Chill Response, DTC may request additional information from the issuer (‘‘Additional Information Request’’). DTC will set a time frame for the issuer’s response to the Additional Information Request (‘‘Additional Information Response’’), but in no case will it be less than ten Business Days from the date of the Additional Information Request. 5. Deposit Chill Decision If an issuer submits a Deposit Chill Response, DTC will provide the issuer 35 See DTC Rule 5. Rule 22(A)(2)(a)(iv). 37 Proposed Rule 22(A)(2)(a)(iii). In its filing with the Commission, DTC stated that in determining whether counsel is acceptable for this purpose ‘‘DTC refers to the relevant provisions set forth in the Operational Arrangements.’’ Those provisions provide that counsel must be ‘‘an experienced securities practitioner, licensed to practice law in the relevant jurisdiction and in good standing in any bar to which such practitioner is admitted. Such counsel must be engaged in an independent private practice (i.e. not in-house counsel) and may not have a beneficial ownership interest in the security for which the opinion is being provided or be an officer, director or employee of the Issuer.’’ See Operational Arrangements, Section I.A.1. A template legal opinion (‘‘Template’’) will be included with the Deposit Chill Notice. 38 17 CFR 230.144(a)(3). 39 The eligibility requirements are set forth in DTC Rule 5 and Section 1 of DTC’s Operational Arrangements. 40 Proposed Rule 22(A)(2)(b). 36 Proposed E:\FR\FM\25MRN1.SGM 25MRN1 Federal Register / Vol. 79, No. 57 / Tuesday, March 25, 2014 / Notices with a written decision (‘‘Deposit Chill Decision’’). An officer of DTC who did not have a role in the decision to impose the Deposit Chill (‘‘Officer’’) will make the Deposit Chill Decision.41 Timing of Deposit Chill Decision If a Deposit Chill was imposed prior to the issuance of a Deposit Chill Notice, the Deposit Chill Decision will be provided within ten Business Days after receipt of the Deposit Chill Response or the Additional Information Response, if applicable. If a Deposit Chill was not imposed prior to the issuance of a Deposit Chill Notice, the Deposit Chill Decision will be provided within twenty Business Days after receipt of the Deposit Chill Response or the Additional Information Response, if applicable. emcdonald on DSK67QTVN1PROD with NOTICES Effect of Deposit Chill Decision The Deposit Chill Decision will result in DTC either: (i) Not imposing or releasing a Deposit Chill; or (ii) imposing a Global Lock on the security. DTC will not impose a Deposit Chill or will release a Deposit Chill already in place ‘‘if the Officer reasonably determines that the Deposit Chill Response has established that the securities subject thereof satisfy [DTC’s] eligibility requirements’’ particularly that they satisfy DTC’s eligibility requirements as set forth in Rule 5 and Section 1 of DTC Operational Arrangements. DTC will intend to impose a Global Lock if the Officer reasonably determines that the Deposit Chill Response does not satisfy the substantive requirements in the Deposit Chill Notice. DTC will also impose a Global Lock if the issuer does not submit a Deposit Chill Response within the applicable time period. Prior to imposition of the Global Lock in this circumstance, an issuer has ten Business Days to submit a supplemental Deposit Chill Response (‘‘Supplemental Deposit Chill Response’’).42 The issuer is limited in the Supplemental Deposit 41 ‘‘Officer’’ of DTC is defined as ‘‘an Executive Chairman of the Board and a Chief Executive Officer, each of whom shall be elected by the Board of Directors from among its own number, a Chief Operating Officer, one or more Managing Directors, a Secretary, a Treasurer, a Comptroller and an Auditor, and may include one or more Assistant Secretaries and one or more Assistant Treasurers. The officers shall be elected by the Board at the first meeting of the Board after the annual meeting of the shareholders in each year. The Board may elect or appoint other officers (including, but not limited to, a Vice Chairman of the Board, a President and one or more Vice Presidents), agents and employees, who shall have such authority and perform such duties as may be prescribed by the Board. . . . ’’ See DTC By-Laws Section 3.1. 42 Proposed Rule 22(A)(c)(iii). VerDate Mar<15>2010 18:16 Mar 24, 2014 Jkt 232001 Chill Response to demonstrating that (1) it did submit the Deposit Chill Response or Additional Information Response, if applicable, within the required time frame, or (2) DTC made a clerical mistake or a mistake arising from an oversight or omission in reviewing the Deposit Chill Response [or Additional Information Response, if applicable].43 If an issuer submits a Supplemental Deposit Chill Response, the Officer will provide the issuer with a written decision (‘‘Supplemental Deposit Chill Response Decision’’) within ten Business Days of its submission. 6. The Record The record for purposes of any appeal to the Commission will be comprised of: • The Deposit Chill Notice, the Deposit Chill Response, the Deposit Chill Decision, the Supplemental Deposit Chill Response, the Supplemental Deposit Chill Response Decision, the Additional Information Request, and the Additional Information Response; • All documents submitted in connection with the items listed immediately above and; • Any written communications created pursuant to Proposed Rule 22(A)(3)(b)(iv), as described below.44 7. Waiver of Right To Make Submission If an issuer does not comply with any deadline set pursuant to Rule 22(A) or in a Deposit Chill Notice, it waives its right to make the submission unless DTC expressly waives or extends in writing the period for submission.45 8. Reservation of Authority Once DTC has imposed a Deposit Chill, Proposed Rule 22(A) does not prevent it from lifting or modifying the Deposit Chill ‘‘to prevent imminent harm, injury or other such consequences to [DTC] or its Participants or where [DTC] otherwise reasonably determines that such action is necessary to protect the prompt and accurate clearance and settlement of securities transactions through DTC.’’ 46 In addition, for those same reasons, DTC may impose a Deposit Chill after providing an issuer with a Deposit Chill Notice or Additional Information Request but before it has received a Deposit Chill Response or Additional Information Response without waiting for the applicable deadline to arrive.47 In such circumstances, after the Deposit Chill is 43 Proposed Rule 22(A)(c)(iii). Rule 22(A)(b)(3)(iv). 45 Proposed Rule 22(A)(2)(a). 46 Proposed Rule 22(A)(3)(b)(i)(A). 47 Proposed Rule 22(A)(3)(b)(i)(B). 44 Proposed PO 00000 Frm 00120 Fmt 4703 Sfmt 4703 16395 imposed, the procedures in Proposed Rule 22(A)(2)(c) will apply. For example, DTC will issue the Deposit Chill Decision with ten Business Days after receiving the Deposit Chill Response or the Additional Information Response, if applicable.48 Proposed Rule 22(A) also does not prohibit DTC from communicating with an issuer, its transfer agent, or other authorized representative known to DTC in connection with a Deposit Chill.49 As noted above, any such substantive communications will be in writing and part of the record for purposes of any appeal to the Commission. 9. Method of Delivery of Deposit Chill Notice DTC will send the issuer any Deposit Chill Notice via overnight courier to the issuer’s address in its regulatory filings where it is incorporated or otherwise organized. If DTC cannot locate the issuer with reasonable diligence, it will send it the issuer’s designee for service of process or the Secretary of State or any state securities agency of the State where the issuer is incorporated or otherwise organized. If the issuer is not incorporated or otherwise organized in any state, DTC will send them to any similar agent of the jurisdiction where the issuer is incorporated or otherwise organized. B. Proposed Rule 22(B) 1. Scope of Proposed Rule 22(B) The procedures in Proposed Rule 22(B) apply to issuers of Eligible Securities where DTC imposes or intends to impose a Global Lock 50 in conjunction with either of the following: • Judicial Action or Administrative Proceeding: DTC becomes aware that the Commission or other federal or state law enforcement or regulatory authority has commenced a judicial action or administrative proceeding (‘‘Proceeding’’) alleging that ‘‘Defendants’’ 51 sold Eligible Securities in violation of Section 5 of the Securities Act or other applicable law.52 • Deposit Chill: DTC imposes a Global Lock when an issuer does not satisfy the requirements of lifting or not imposing a Deposit Chill in Rule 22(A)(2)(c)(ii) and (iii).53 48 Proposed Rule 22(A)(3)(c). Rule 22(A)(3)(b)(iv). 50 Proposed Rule 22(B)(1). 51 Proposed Rule 22(B) defines ‘‘Defendants’’ as a defendant, defendants, and other subjects of the action. 52 Proposed Rule 22(B)(1)(a). 53 Proposed Rule 22(B)(1)(b). 49 Proposed E:\FR\FM\25MRN1.SGM 25MRN1 16396 Federal Register / Vol. 79, No. 57 / Tuesday, March 25, 2014 / Notices 2. Global Lock Notice DTC will send notice of the Global Lock (‘‘Global Lock Notice’’) to an issuer: • No later than twenty Business Days prior to the imposition of the Global Lock 54 or; • no later than three Business Days after imposition of the Global Lock in the event DTC must first impose the Global Lock: Æ ‘‘in order to prevent imminent harm, injury or other such consequences to [DTC] or its Participants;’’ or Æ if DTC ‘‘reasonably determines that such action is necessary to protect the prompt and accurate clearance and settlement of securities transactions through [DTC].’’ 55 The Global Lock Notice will inform the issuer of the reasons for DTC’s actions, including the legal authority upon which DTC relies.56 It will also provide the date the Global Lock was imposed or the date it will be imposed should the issuer fail to respond to the Global Lock Notice.57 With respect to the issuer’s response, the Global Lock Notice will set forth the following: 58 3. Global Lock Response If the issuer elects to contest the Global Lock, it may submit a response (‘‘Global Lock Response’’) in the form and containing the substance provided in the Global Lock Notice. If the Global Lock Notice is based on a Proceeding as described in Proposed Rule 22(B)(1)(a), it will contain notice that a Global Lock will not be imposed, or, if already imposed, will be released if the issuer demonstrates either (1) that the Eligible Securities were not the intended subject of the Proceeding, or (2) that the Proceeding was withdrawn or dismissed on the merits with prejudice or otherwise resolved in a final, nonappealable judgment in favor of the Defendants. DTC must receive the Global Lock Response with twenty Business Days after the date of the Global Lock Notice. However, DTC may extend this deadline for up to an additional twenty Business Days if the issuer establishes ‘‘good cause.’’ emcdonald on DSK67QTVN1PROD with NOTICES Effect of Global Lock Decision The Global Lock Decision will result in DTC either: (i) Not imposing or releasing a Global Lock; or (ii) imposing or not releasing a Global Lock on the security. DTC will not impose a Global Lock, or will release a Global Lock already in place, if it reasonably determines that the Global Lock Response satisfies the requirements set forth in the Global Lock Notice.60 If DTC reasonably determines that the Global Lock Response does not satisfy those requirements, it will impose or not release the Global Lock, as applicable. 5. Release of Global Lock Stemming From a Proceeding Proposed Rule 22(B)(3) provides for the release of Global Locks imposed pursuant to a Proceeding as set forth in Proposed Rule 22(B)(1)(a). However, if the safe harbor under Securities Act Rule 144 is not available to the issuer pursuant to Securities Act Rule 144(i),61 the issuer is not eligible for relief under this provision.62 For those issuers, the Global Lock will remain in place until it complies with the requirements of Securities Act Rule 144(i)(2).63 For all other issuers, the length of the Global Lock will depend in the first instance on whether the issuer is subject to the reporting requirements of Sections 13(a) and 15(d) of the Exchange Act. If the issuer is subject to such requirements, the Global Lock will be lifted six months after the ‘‘Disposition.’’ 64 If the issuer is not subject to the reporting requirements, the Global Lock will be lifted one year after either the entry of a judicial order Rule 22(B)(c). Rule 22(B)(2)(c). 61 See 17 CFR 230.144(i). 62 Proposed Rule 22(B)(3). 63 Id. 64 Proposed Rule 22(B)(3)(b). Proposed Rule 22(b)(3)(a)(ii) defines ‘‘disposition’’ as ‘‘a final order of the Commission pursuant to Rule 360(d)(2) or Rule 411(a) of the Commission’s Rules of Practice that disposes of the claims against those Defendants allegedly responsible for the violations of Section 5 of the Securities Act relating to the Eligible Securities. 60 Proposed If an issuer submits a Global Lock Response, DTC will provide the issuer 54 Proposed Rule 22(B)(2). Rule 22(B)(2). 56 Proposed Rule 22(B)(2)(a)(i). 57 Id. 58 Also included with the Global Lock Notice will be a copy of Proposed Rule 22(B). See Proposed Rule 22(B)(2)(a)(iv). 55 Proposed 18:16 Mar 24, 2014 Timing of Global Lock Decision If a Global Lock was imposed prior to the issuance of a Global Lock Notice, the Global Lock Decision will be provided within ten Business Days after receipt of the Global Lock Response. If a Global Lock was not imposed prior to the issuance of a Global Lock Notice, the Global Lock Decision will be provided within twenty Business Days after receipt of the Global Lock Response. or judgment or, if the Commission brought an administrative proceeding, the Disposition.65 Under Section 3 of Proposed Rule 22(B), an issuer may be required to submit a Legal Opinion and/or other evidence or documentation as DTC may reasonably require.66 6. Release of a Global Lock Stemming From a Deposit Chill Under Proposed Rule 22(A)(2)(c) Section 4 of Proposed Rule 22(B) provides for the release of Global Locks imposed when an issuer fails to satisfy the requirements for lifting a Deposit Chill in Sections 2(c)(ii) and (iii) of Proposed Rule 22(A). Like Section 3 of Proposed Rule 22(B), the length of the Global Lock will depend on whether the issuer is subject to the reporting requirements under Section 13 or Section 15(d) under the Exchange Act. If the issuer is such a reporting company, the Global Lock will be lifted six months after its imposition.67 If the issuer is not such a reporting company, the Global Lock will be lifted one year after its imposition.68 As in Section 3 of Proposed Rule 22(B), a Global Lock will remain in place for those issuers for which the safe harbor under Securities Act Rule 144 would be unavailable pursuant to Rule 144(i) until the issuer complies with the requirements of Securities Act Rule 144(i)(2).69 7. Record The record for purposes of any appeal to the Commission consists of the Global Lock Notice, the Global Lock Response, and the Global Lock Decision.70 8. Waiver of Right To Make Submission If an issuer does not comply with any deadline set pursuant to Rule 22(B) or in a Global Lock Notice, it waives its right to make the submission unless DTS expressly waives or extends in writing the period for submission.71 9. Reservation of Authority Once DTC has imposed a Global Lock, Proposed Rule 22(B) does not prevent it from lifting or modifying the Global Lock ‘‘to prevent imminent harm, injury or other such consequences to [DTC] or 59 Proposed 4. Global Lock Decision VerDate Mar<15>2010 with a written decision (‘‘Global Lock Decision’’).59 Jkt 232001 PO 00000 Frm 00121 Fmt 4703 Sfmt 4703 65 Proposed Rule 22(B)(2)(a)(i) and (ii). Rule 22(B)(3)(c). As with a Legal Opinion regarding a Deposit Chill Notice, any Legal Opinion an issuer submits regarding a Global Local Notice must be in a form and substance satisfactory to DTC and be from an independent securities counsel reasonably acceptable to DTC. Id. 67 Proposed Rule 22(B)(4). 68 Id. 69 Id. 70 Proposed Rule 22(B)(2)(d). 71 Proposed Rule 22(B)(5)(a). 66 Proposed E:\FR\FM\25MRN1.SGM 25MRN1 Federal Register / Vol. 79, No. 57 / Tuesday, March 25, 2014 / Notices its Participants or where [DTC] otherwise reasonably determines that such action is necessary to protect the prompt and accurate clearance and settlement of securities transactions through [DTC].’’ 72 In addition, for those same reasons, DTC may impose a Global Lock after providing an issuer with a Global Lock Notice but before it has received a Global Lock Response before the applicable deadline.73 In such circumstances, after the Global Lock is imposed, the procedures in Section 2(c) of Proposed Rule 22(B) will apply. For example, DTC will issue the Global Lock Decision with ten Business Days after receiving the Global Lock Response.74 Proposed Rule 22(B) also does not prohibit DTC from communicating with an issuer, its transfer agent of other authorized representative known to DTC in connection with a Global Lock.75 As noted above, any such substantive communications will be in writing and part of the record for purposes of any appeal to the Commission. In addition, nothing in Proposed Rule 22(B) displaces any legal or regulatory requirements that DTC is subject to under applicable law, rule or regulation.76 If DTC imposes a Global Lock for reasons other than those described in Proposed Rule 22(B), it will, however, apply the procedures set forth in Proposed Rule 22(B).77 10. Method of Delivery of Global Lock Notice DTC will send the issuer any Global Lock Notice via overnight courier to the issuer’s address in its regulatory filings where it is incorporated or otherwise organized.78 If DTC cannot locate the issuer with reasonable diligence, it will send them to the issuer’s designee for service of process or the Secretary of State or any state securities agency of the State where the issuer is incorporated or otherwise organized.79 If the issuer is not incorporated or otherwise organized in any state, DTC will send them to any similar agent of the jurisdiction where the issuer is incorporated or otherwise organized.80 emcdonald on DSK67QTVN1PROD with NOTICES III. Summary of Comments and DTC’s Responses The Commission received nine comment letters from seven commenters 72 Proposed Rule 22(B)(5)(b)(i)(A). Rule 22(A)(5)(b)(i)(B). 74 Proposed Rule 22(B)(5)(c). 75 Proposed Rule 22(B)(5)(b)(iv). 76 Proposed Rule 22(B)(5)(b)(iii). 77 Id. 78 Proposed Rule 22(B)((5)(c). 79 Id. 80 Id. 73 Proposed VerDate Mar<15>2010 18:16 Mar 24, 2014 Jkt 232001 on the Proposed Rules. DTC submitted two letters responding to comments. The summary of comments and DTC’s responses are organized into three categories: (i) Notice to issuers, (ii) opportunity to be heard, and (iii) fair procedures.81 A. Notice to Issuers 1. Comments Regarding Meaning of ‘‘Imminent Harm’’ One commenter believes that DTC’s ability to impose a Deposit Chill or Global Lock ‘‘to prevent imminent harm, injury or other such consequences to [DTC] or its Participants, or where [DTC] otherwise reasonably determines that such action is necessary to protect the prompt and accurate clearance and settlement of securities transactions through [DTC]’’ is overly broad, ripe for abuse, and has the potential to render the advance notice procedure meaningless.82 Commenters also question what constitutes ‘‘imminent harm’’ and requests that DTC clarify the term.83 One commenter believes DTC should be required to clearly outline the minimum showing of imminent harm that would be needed to justify the imposition of a restriction prior to providing the issuer with notice.84 This commenter requests that DTC develop procedures for an expedited proceeding that should mirror FINRA Rule 9552.85 One commenter does not believe that Section 17A authorizes DTC to restrict an issuer’s access to its facilities without prior notice.86 One commenter does not believe that the Proposed Rules require DTC to articulate what the ‘‘imminent harm’’ is in the Deposit Chill Notice, but rather only provide notice of the restriction and the reasons for the restriction. The commenter recommends that DTC be 81 Two commenters argued about that the scope of the Proposed Rules should be broader. Both of these commenters interpret Proposed Rule 22(A) to apply only when DTC imposes a Deposit Chill upon detecting ‘‘unusually large volumes of deposits of a low priced or thinly traded Eligible Security.’’ See STA Letter at 3–4; Sichenzia Letter I at 3. One of these commenters interprets Proposed Rule 22(B) to apply only when DTC becomes aware of a judicial or administrative proceeding or when an issuer has failed to meet the threshold for lifting a Deposit Chill. See Sichenzia Letter at 3. DTC responded that the Proposed Rules are broader than the commenters’ interpretation. See DTC Letter I at 13– 14 (citing Proposed Rule 22(A)(3)(b)(iii) and Proposed Rule 22(B)(5)(b)(iii)). One commenter believes the Proposed Rules should apply to other persons using DTC’s services, including transfer agents. See STA Letter at 7–8. 82 See Sichenzia Letter I at 4. 83 See Sichenzia Letter I at 4; Kogan Letter at 3. 84 See Kogan Letter at 3. 85 See Kogan Letter at 3. 86 See Kogan Letter at 2. PO 00000 Frm 00122 Fmt 4703 Sfmt 4703 16397 required to articulate the potential risks and who faces those risks.87 DTC responds that it ‘‘has provided meaningful standards to justify imposition of restrictions in those cases where prior notice is not feasible.’’ 88 It cites to International Power where the Commission stated that DTC may impose restrictions prior to providing notice ‘‘[i]f DTC believes that circumstances exist that justify imposing an suspension of services with respect to an issuer’s securities in advance of being able to provide the issuer with notice and an opportunity to be heard on the suspension.’’ The Commission further stated that DTC may act to avoid imminent harm, but it must then provide ‘‘expedited fair process to the affected issuer.’’ 89 DTC explains that ‘‘[w]hen its monitoring system detects that Participants may be in the process of currently and consistently depositing ineligible securities into the system, DTC may impose a Deposit Chill without prior notice to stop further deposits of such ineligible securities.’’ 90 It also believes that Rule 22(A) provides issuers with expedited fair process. Based on its experience using the procedures in the Proposed Rule Change over the past months, DTC notes that in the ‘‘majority of cases’’ it has provided notice to issuers prior to imposing a Deposit Chill.91 With respect to Global Locks, DTC believes it is able to institute them as soon as possible once the Commission alleges that the proffered exemption and all other possible exemptions are not applicable.92 As with Deposit Chills, over the past months DTC has provided notice to issuers prior to imposing a Global Lock in a majority of cases.93 2. Comments Regarding the Deposit Chill Notice One commenter believes that in order for issuers to have the opportunity to fully understand and respond to the issues raised in the Deposit Chill Notice, DTC must provide in the Deposit Chill Notice the reasons for the Deposit Chill or Global Lock in light of DTC’s Eligibility Requirements.94 DTC responds that the Proposed Rule change requires the Deposit Chill Notice and the Global Lock Notice to contain the 87 See Kogan Letter at 3. DTC Letter I at 8. 89 Int’l Power, 2012 SEC LEXIS 844, at *29. 90 See DTC Letter I at 9. 91 See DTC Letter I at 9. 92 See DTC Letter I at 9. 93 See DTC Letter I at 9. 94 See STA Letter at 4. 88 See E:\FR\FM\25MRN1.SGM 25MRN1 16398 Federal Register / Vol. 79, No. 57 / Tuesday, March 25, 2014 / Notices reasons for the service restriction and provide the required form of response.95 One commenter believes that the named transfer agent of an issuer should also receive the Deposit Chill Notice and the Global Lock Notice. This commenter states that providing notice to the transfer agent would allow it to protect the interests of other registered shareholders of the issuer, as well as its own interests.96 Another commenter does not believe that notice to a transfer agent is reasonably calculated to provide notice to the issuer, and instead suggests notice be given to the registered agent for service of process or the Secretary of State in the state of incorporation.97 One commenter also believes that DTC should give contemporaneous notice to the Commission. It believes this is necessary in order for the issuer to be able to seek a ‘‘stay of the restriction.’’ 98 DTC responds that it does not need to replicate in its rules the Commission’s Rules of Practice.99 Another commenter believes that DTC should be required to notify law enforcement if it notices ‘‘a pattern by depositors.’’ 100 B. Opportunity To Be Heard 1. Comments Requesting an Opportunity for an In-Person Hearing and Internal Appeal Three commenters believe that Section 17A of the Exchange Act requires DTC to provide affected issuers the opportunity to request a hearing to appeal the decision to institute a Deposit Chill or Global Lock within DTC.101 Commenters cite to other SRO rules that afford affected parties the opportunity for a hearing in similar contexts, specifically, FINRA Rule 6490 and NASDAQ Rule 5815.102 Commenters also note that DTC Rule 22 permits issuers to contest any decision to deny their status as an Eligible Security by filing a request for a hearing. Such a hearing takes place before three members of a panel selected 95 See DTC Letter I at 12. STA Letter at 6. This commenter stated that the Commission has increasingly sought to impose obligations on transfer agents in this area and has expressed that transfer agents may fact liability under Section 5 of the Securities Act in some circumstances. 97 See Kogan Letter at 4. 98 See Kogan Letter at 3. 99 See DTC Letter I at 12 (citing Rule 420(b) of the Commission’s Rule of Practice, 17 CFR 201.420). 100 See Shatto Letter at 1. 101 See STA Letter at 5; Sichenzia Letter I at 2; Sichenzia Letter II at 2; Kogan Letter at 4–5. One of these commenters requests ‘‘a hearing or an internal appeals process that is meaningful.’’ See Sichenzia Letter II at 2. 102 See STA Letter at 5; Sichenzia Letter II at 2. by the Chairman of the Board of the Depository Trust and Clearing Corporation, the parent company of DTC, from a pool of persons employed by or partners of Participants.103 One commenter notes that in the event that an issuer is subject to a Deposit Chill or a Global Lock, the effect of that decision by DTC is the same as though it has been denied status as an Eligible Security. As a result, this commenter argues that issuers should be afforded a hearing, just as they are under Rule 22.104 Another commenter similarly believes issuers must be afforded a hearing like those provided under DTC Rule 22.105 This commenter believes the Commission thought the issuer in International Power should have been given a hearing, although the commenter notes the Commission never held that DTC is required to provide a hearing.106 The commenter points to the following statement from the Commission’s opinion: ‘‘DTC has not articulated an adequate rationale for providing a hearing to an issuer for whose securities DTC will provide no service, but not to an issuer whose securities are denied those clearance and settlement services that go to the heart of DTC’s role as a clearing agency.’’ 107 The commenter also believes that the Commission’s references to FINRA Rule 9558, which requires a hearing, supports its position that the Commission intended for DTC to provide issuers a hearing.108 In response to these comments, DTC states that while Section 17A(b)(3)(H) requires DTC to provide persons with fair procedures when restricting services and Section 17A(b)(5)(B) requires that fair procedures include notice and an opportunity to be heard, nothing in 17A requires DTC to provide issuers with an in-person testimonial hearing.109 DTC also provides that the Commission’s opinion in International Power did not specify the procedures DTC should apply, but rather stated that DTC should ‘‘adopt procedures that accord with the fairness requirements of Section emcdonald on DSK67QTVN1PROD with NOTICES 96 See VerDate Mar<15>2010 18:16 Mar 24, 2014 Jkt 232001 17A(b)(3)(H), which may be applied uniformly in any future such cases.’’ 110 DTC also notes that even though the Commission refers to DTC Rule 22 in International Power, it did not state that DTC should apply those procedures when instituting Deposit Chills or Global Locks.111 With respect to the procedures in FINRA Rule 6490 and NASDAQ Rule 5815, DTC responds that it has a different role in the securities industry than FINRA and NASDAQ.112 It notes that FINRA and NASDAQ have disciplinary and adjudicatory mandates ‘‘to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade. . . .’’ 113 DTC provides that it ‘‘does not perform a policing function to root out fraudulent and manipulative conduct in violation of the securities laws.’’ 114 DTC therefore concludes that ‘‘[t]here is no basis to compare FINRA and NASDAQ’s adjudicatory procedures arising from their policing functions with the fair procedures provided by DTC for compliance with its eligibility standards.’’ 115 With respect to commenter’s assertions that the Commission’s opinion in International Power, and specifically its references to FINRA Rule 9558, indicates a hearing is required, DTC notes the Commission’s statement that ‘‘DTC may design such processes in accordance with its own internal needs and circumstances.’’ 116 In addition, DTC provides that the reference to FINRA Rule 9558 was regarding notice and expedited fair process where action is necessary to avoid imminent harm.117 2. Comments Regarding Due Process One commenter questions whether DTC’s procedures provide issuers with due process, and specifically the ‘‘opportunity to present its objections to the allegations that form the justification for the restriction.’’ 118 It believes DTC should allow the issuer to ‘‘litigate’’ the issues raised in the regulatory 103 See 110 Id. 104 See 111 Id. STA Letter at 5; Sichenzia Letter I at 3. STA Letter at 5. Commenters recommend allowing issuers to use the hearing process outlined in Rule 22. See STA Letter at 5; Sichenzia Letter I at 3. One of these commenters also recommends Rule 22 be amended to provide that the three person panels that hear appeals from decisions made by DTC be comprised of one person that is employed by, or a partner of, a registered transfer agent. See STA Letter at 5–6. 105 See Sichenzia Letter II at 2. 106 See Sichenzia Letter II at 2. 107 See Sichenzia Letter II at 2 (citing Int’l Power, 2012 SEC LEXIS 844, at *20). 108 See Sichenzia Letter II at 2. 109 See DTC Letter I at 2–3. PO 00000 Frm 00123 Fmt 4703 Sfmt 4703 112 See DTC Letter I at 5. DTC Letter I at 5 (citing Exchange Act Sections 15A(b)(6) and 6(b)(5)). 114 See DTC Letter I at 5. 115 See DTC Letter I at 5. DTC also characterizes FINRA Rule 6490 and NASDAQ Rule 5815 as ‘‘appeals from fact-intensive determinations.’’ It contrasts this with the Proposed Rule Change, which it states does not contemplate that DTC will engage in independent fact finding. See DTC Letter I at 7. 116 See DTC Letter II at 2. 117 See DTC Letter II at 2. 118 See Kogan Letter at 4. 113 See E:\FR\FM\25MRN1.SGM 25MRN1 Federal Register / Vol. 79, No. 57 / Tuesday, March 25, 2014 / Notices proceeding that forms the basis of a Global Lock.119 DTC responds by stating that Section 17A establishes its obligations, not the Fourteenth Amendment’s due process clause.120 It further states that even if due process standards did apply, the Proposed Rules meets those standards; due process does not require an evidentiary or in-person hearing.121 C. Fair Procedures 1. Comment Regarding Requirement To Provide a Legal Opinion One commenter is concerned that Proposed Rule 22(A) gives DTC the authority to require a Legal Opinion covering any issuer security deposited at any time rather than only those securities deposited over the specific time frames that are the subject of concern.122 This commenter states that this open-ended inquiry imposes an unfair burden on issuers.123 2. Comments Regarding Disproportionate Burden on Smaller Issuers Commenters note that most of the issuers affected by DTC’s actions with respect to the imposition of a Deposit Chill or Global Lock will likely be small and midsize companies, and that Restraints of DTC services can dramatically affect the lives of the officers, directors, and shareholders of these companies.124 For this reason, two commenters believe that DTC must ensure a fair process that will reduce the likelihood of harm to innocent parties— including the issuer and its investors.125 One commenter questions why Sections 3 and 4 of Proposed Rule 22(B) adversely treats former shell companies and believes they should be treated the same as any other public companies.126 3. Comments Regarding Timing for Lifting a Deposit Chill emcdonald on DSK67QTVN1PROD with NOTICES One commenter believes that the timing for lifting a Deposit Chill as compared to a Global Lock is counterintuitive.127 According to this commenter, a Global Lock, which is typically imposed as a result of enforcement proceedings, should not be easier to remedy than a Deposit Chill, which is usually imposed based on ‘‘mere’’ concerns regarding a security’s 119 See 120 See Kogan Letter at 4. DTC Letter I at 4. Brilleman Letter at 2. Brilleman Letter at 2. 130 See Brilleman Letter at 1. 131 See Brilleman at 1. 132 See DTC Letter I at 13. 133 See STA Letter at 6. 134 See STA Letter at 7. 135 See STA Letter at 7. 136 See Sichenzia Letter I at 5. 129 See 122 See Sichenzia Letter I at 5. Sichenzia Letter I at 5. 124 See STA Letter at 2; Sichenzia Letter I at 6. 125 See STA Letter at 2. 126 See Sichenzia Letter I at 6. 127 See Brilleman Letter at 2. 123 See 18:16 Mar 24, 2014 4. Comments Regarding Timing for Lifting a Global Lock Under Proposed Rule 22(B), the trigger for releasing a Global Lock is the resolution of the regulatory matter in a judicial order or an administrative decision (or some other indication that the issuer was incorrectly identified in the Proceeding). One commenter believes this standard is not workable because matters instituted by regulatory agencies may not be resolved for many years, if at all, may not be resolved in a formal fashion, and may be resolved only regarding some Defendants or some claims.133 The commenter recommends that issuers affected by a Global Lock or a Deposit Chill should be permitted to apply to DTC one year after the imposition of any Deposit Chill or Global Lock to have their affected securities declared Eligible Securities.134 This application could include a Legal Opinion that DTC may rely upon, and DTC could afford issuers a hearing under DTC Rule 22 should DTC determine not to release the relevant restriction based on the Legal Opinion.135 Another commenter argued that the timing for the release of a Global Lock is too long and stated ‘‘it would be a near miracle if a public company in need of working capital were able to survive through years of being subject to a [G]lobal [L]ock.’’ 136 This commenter recommended lifting a Global Lock six months or one year after the 128 See 121 Id. VerDate Mar<15>2010 eligibility.128 The commenter recommends that Deposit Chills be lifted automatically after a certain period of time.129 One commenter is concerned that the Proposed Rules do not address cases of issuers whose securities were subjected to a Deposit Chill prior to the Commission’s opinion in International Power.130 This commenter suggests Deposit Chills imposed prior to International Power be lifted after a certain period of time or DTC should follow procedures to make a ‘‘fairness determination’’ based on the facts and circumstances of a particular case.131 In its response, DTC states that if an issuer whose securities were restricted prior to International Power requests a review, DTC has been following the procedures in the Proposed Rules.132 Jkt 232001 PO 00000 Frm 00124 Fmt 4703 Sfmt 4703 16399 commencement of an enforcement proceeding, and believes at such time the burden is on the Commission to take action to suspend any further trading in the issuer’s securities.137 5. Comments Regarding Public Notice of Deposit Chills and Global Locks Two commenters recommend that DTC make a list of companies subject to Deposit Chills and Global Locks publicly available on its Web site.138 Commenters stated that issuers subject to these restrictions often do not inform their shareholders or potential investors and at times issuers misrepresent the reasons for the imposition of the restrictions in order to continue raising capital.139 These commenters also believe publicizing which issuers are subject to DTC restrictions would deter future fraudulent securities sales and protect investors.140 One investor also states that publication of issuer and DTC responses would be beneficial to shareholders and potential investors.141 Another commenter requests the publication of Legal Opinions, arguing that this would reduce the number of restrictions and reduce the impact on the market.142 DTC states that while it understands commenters concerns, it is the issuer’s responsibility to decide whether to disclose all of this information.143 DTC issues an Important Notice when imposing a Global Lock and those Important Notices are published on DTC’s Web site.144 In its response, DTC provides that it is considering whether similar disclosures regarding Deposit Chills would be appropriate.145 6. Comment Regarding Persons Authorized To Initiate Process and Make Final Determinations One commenter expressed concern over the number of individuals who would be ‘‘Officers’’ under the Proposed Rules, and thus able to make decisions to deny an issuer access to DTC.146 This commenter stated any such decisions ‘‘should be given serious and formal consideration by senior, experienced professionals that are familiar with securities markets and the federal 137 See Sichenzia Letter I at 5. Hamilton Letter at 1; DTCC BigBake Letter I at 1; DTCC BigBake Letter II at 1. 139 See Hamilton Letter at 1; DTCC BigBake Letter I at 1. 140 See Hamilton Letter at 1; DTCC BigBake Letter I at 1. 141 See Hamilton Letter at 1. 142 See DTCC BigBake Letter I at 2. 143 See DTCC Letter at 12. 144 See DTCC Letter at 12. 145 See DTCC Letter at 12. 146 See STA Letter at 4. 138 See E:\FR\FM\25MRN1.SGM 25MRN1 16400 Federal Register / Vol. 79, No. 57 / Tuesday, March 25, 2014 / Notices securities laws, and that have the authority and independent to make decisions.’’ 147 With respect to independence, this commenter recommends that an Officer making these decisions should be in a separate reporting line or senior to the Officer who made the initial decision. Along these lines, the commenter believes the Board of Directors should appoint specific officers to review issuer responses and make decisions.148 In its response to these comments, DTC notes that DTC Officers are by definition ‘‘high ranking and charge with substantial responsibility.’’ 149 In addition, DTC believes the reviewing Officer is independent because it was not involved in the decision to impose the restriction in the first instance.150 One commenter recommends that the Proposed Rules be amended to require that the initiation of an action to impose Deposit Chills should be authorized by senior Officers of DTC designated by the Board of Directors, or the Chief Executive Officer, to take such actions.151 DTC believes this is unnecessary because a senior-level committee of officers from DTC’s Operations, Risk Management, Product Management, Application Development and Maintenance, Legal and Compliance currently make, and will continue to make, the decision to impose service restrictions.152 emcdonald on DSK67QTVN1PROD with NOTICES IV. Description of Amendment No. 1 As noted above, one commenter requested that DTC send the Deposit Chill Notice to the issuer’s transfer agent in addition to the issuer itself.153 Amendment No. 1 incorporates this requirement into the Proposed Rules and provides that DTC will send a copy of the Deposit Chill Notice to the issuer’s transfer agent via overnight courier. V. Description of Amendment No. 2 Amendment No. 2 makes a number of clarifying revisions to the Proposed Rules to more accurately reflect their intended operation. First, DTC proposes to amend Proposed Rules 22(A)(2)(A)(i) to clarify that when the Deposit Chill Notice is sent prior to the imposition of a Deposit Chill, the date included as the date the Deposit Chill will be imposed sets forth the date in circumstances in which the issuer does not respond to the Deposit 147 See STA Letter at 4. STA Letter at 4. 149 See STA Letter at 11. 150 See STA Letter at 11. 151 See STA Letter at 4. 152 See DTC Letter I at 11. 153 See STA Letter at 6. 148 See VerDate Mar<15>2010 18:16 Mar 24, 2014 Jkt 232001 Chill Notice in the time or manner provided in the Proposed Rules. Second, DTC proposes to amendment Proposed Rule 22(A)(2)(A)(iv) to clarify that DTC may extend the date for an issuer to submit a Deposit Chill Response ‘‘up to’’ an additional twenty Business Days. Third, DTC proposes to revise Proposed Rule 22(A)(2)(c) to provide when the issuer fails to comply with a deadline in connection with an Additional Information Request, DTC will provide the issuer with a Deposit Chill Decision within twenty Business Days after the missed deadline. Fourth, DTC proposes to clarify that the Additional Information Request and the Additional Information Response are part of the record for purposes of any issuer appeal to the Commission under Proposed Rule 22(A)(2)(d). Fifth, DTC proposes to amend Proposed Rule 22(A)(3)(a), which provides that unless the DTC expressly waives or extends in writing the applicable period for a submission of a Deposit Chill Response, an issuer waives the right to make the submission for which the deadline has passed. DTC’s amendment would revise this section so that the reference to a DTC waiver relates to the applicable period for any type of submission provided for under Proposed Rule 22(A) and not only to a Deposit Chill Response. Sixth, DTC proposes to amend Proposed Rule 22(A)(3)(c) to correct the reference to ‘‘Deposit Chill Response’’ by replacing it with ‘‘Deposit Chill Decision.’’ Seventh, among the criteria for determining the application of the procedures provided under Proposed Rule 22(B), Section 1(b) provides that the procedures will apply where a Global Lock has been imposed as a result of an issuer’s failure to satisfy the requirements for lifting a Deposit Chill in Proposed Rule 22(A)(2)(c). DTC proposes to amend Proposed Rule 22(B)(1)(b) to clarify that the procedures in Proposed Rule 22(B) will also apply where an issuer has failed to satisfy the requirements for not imposing a Deposit Chill. Eighth, DTC proposes to amend Proposed Rules 22(B)(2)(a)(i) to clarify that when the Global Lock Notice is sent prior to the imposition of a Global Lock, the date included as the date the Global Lock will be imposed sets forth the date in circumstances in which the issuer does not respond to the Global Lock Notice in the time or manner provided in the Proposed Rules. Ninth, DTC proposes to amend Proposed Rule 22(B)(2)(a)(iii) to clarify that DTC may extend the date for an PO 00000 Frm 00125 Fmt 4703 Sfmt 4703 issuer to submit a Global Lock Response ‘‘up to’’ an additional twenty Business Days. Tenth, DTC proposes to amend Proposed Rule 22(B)(2)(c) to provide in the case of a Global Lock imposed before issuance of the Global Lock Notice, DTC will provide the issuer with a Global Lock Decision within ten Business Days after receipt of the Global Lock Response, rather than within ten Business Days after imposition of the Global Lock. Eleventh, DTC proposes to amend Proposed Rule 22(B)(2)(c) to clarify that, in the event that DTC reasonably determines that a Global Lock Response does not satisfy the requirements of the Global Lock Notice, in addition to not releasing a Global Lock that is already in place in, DTC will also impose a Global Lock if one is not yet in place. Twelfth, DTC proposes to add a new provision providing that if DTC imposes a Global Lock pursuant to Proposed Rule 22(B)(5)(b) that the procedures contained in Proposed Rule 22(B) will apply, including that DTC will provide a Global Lock Decision within ten Business Days after it receives the Global Lock Response. VI. Proceedings To Determine Whether to Approve or Disapprove SR–DTC– 2013–11 and Grounds for Disapproval Under Consideration The Commission is instituting proceedings pursuant to Section 19(b)(2)(B) of the Act to determine whether the Proposed Rules should be approved or disapproved. As noted above, institution of proceedings does not indicate that the Commission has reached any conclusions with respect to any of the issues involved. Rather, the Commission seeks and encourages interested persons to comment on the Proposed Rule as set forth in Amendment Nos. 1 and 2, and provide the Commission with arguments to support the Commission’s analysis as to whether to approve or disapprove the proposal, as amended. Pursuant to Section 19(b)(2)(B) of the Exchange Act,154 the Commission is providing notice of the grounds for disapproval under consideration. In particular, Section 17A(b)(3)(H) requires, among other things, that the rules of a clearing agency provide a fair procedure when the clearing agency prohibits or limits access to the clearing agency’s services to a person.155 In addition, Section 17A(b)(5) of the Exchange Act requires clearing agencies, when determining whether to deny or 154 19 155 15 E:\FR\FM\25MRN1.SGM 15 U.S.C. 78s(b)(2)(B). U.S.C. 78q–1(b)(3)(H). 25MRN1 Federal Register / Vol. 79, No. 57 / Tuesday, March 25, 2014 / Notices limit access to its services, (i) to give persons in any proceeding an opportunity to be heard upon the specific grounds for the denial, prohibition, or limitation, and (ii) to keep a record of those proceedings.156 As noted above, commenters raised concerns as to whether the Proposed Rules are consistent with the requirements to provide ‘‘fair procedures,’’ ‘‘notice’’ and ‘‘an opportunity to be heard.’’ The Commission believes that question remain as to whether the Proposed Rules are consistent with the requirements of the Exchange Act. Section 19(b)(2)(B) of the Act provides that proceedings to determine whether to approve or disapprove a proposed rule change must be concluded within 180 days of the date of publication of notice of the filing of the proposed rule change. The time for conclusion of the proceedings may be extended for up to an additional 60 days if the Commission finds good cause for such extension and publishes its reasons for so finding or if the self-regulatory organization consents to the extension. VII. Request for Written Comments The Commission requests that interested persons provide written submissions of their views, data, and arguments with respect to the concerns identified above, as well as any others they may have with the Proposed Rules, as amended. In particular, the Commission invites the written views of interested persons concerning whether the Proposed Rules, as modified by Amendment Nos. 1 and 2, are inconsistent with Sections 17A(b)(3)(H) and 17A(b)(5) or any other provision of the Exchange Act, or the rules and regulations thereunder. Although there do not appear to be any issues relevant to approval or disapproval which would be facilitated by an oral presentation of views, data, and arguments, the Commission will consider, pursuant to Rule 19b–4, any request for an opportunity to make an oral presentation.157 Interested persons are invited to submit written data, views, and arguments on or before April 15, 2014. Any person who wishes to file emcdonald on DSK67QTVN1PROD with NOTICES 156 15 U.S.C. 78q–1(b)(5). 157 Section 19(b)(2) of the Exchange Act, as amended by the Securities Acts Amendments of 1975, Public Law 94–29, 89 Stat. 97 (1975), grants the Commission flexibility to determine what type of proceeding—either oral or notice and opportunity for written comments—is appropriate for consideration of a particular proposal by a selfregulatory organization. See Securities Acts Amendments of 1975, Report of the Senate Committee on Banking, Housing and Urban Affairs to Accompany S. 249, S. Rep. No. 75, 94th Cong., 1st Sess. 30 (1975). VerDate Mar<15>2010 18:16 Mar 24, 2014 Jkt 232001 a rebuttal to any other person’s submission must file that rebuttal on or before April 29, 2014. Comments may be submitted by any of the following methods: BILLING CODE 8011–01–P • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– DTC–2013–11 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–DTC–2013–11. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filings also will be available for inspection and copying at the principal office of DTC and on DTC’s Web site at https://dtcc.com/en/legal/sec-rulefilings.aspx. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–DTC–2013–11 and should be submitted on or before April 15, 2014. If comments are received, any rebuttal comments should be submitted on or before April 29, 2014. Frm 00126 Fmt 4703 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.158 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–06459 Filed 3–24–14; 8:45 am] Electronic Comments PO 00000 16401 Sfmt 4703 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–71747; File No. SR–EDGX– 2014–05] Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of Filing of Proposed Rule Change To Adopt a New Order Type Called the Mid-Point Discretionary Order March 19, 2014. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that, on March 7, 2014, EDGX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘EDGX’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of the Substance of the Proposed Rule Change The Exchange proposes to proposes to [sic] amend: (i) Rule 11.5(c) to add a new order type called the Mid-Point Discretionary Order; and (ii) Rule 11.8(a)(2)(D) to reflect the priority of Mid-Point Discretionary Orders. The text of the proposed rule change is available on the Exchange’s Internet Web site at www.directedge.com, at the Exchange’s principal office, and at the Public Reference Room of the Commission. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. 158 17 CFR 200.30–3(a)(57). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\25MRN1.SGM 25MRN1

Agencies

[Federal Register Volume 79, Number 57 (Tuesday, March 25, 2014)]
[Notices]
[Pages 16392-16401]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-06459]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71745; File No. SR-DTC-2013-11]


Self-Regulatory Organizations; Depository Trust Company; Notice 
of Filing Amendment Nos. 1 and 2 and Order Instituting Proceedings To 
Determine Whether To Approve or Disapprove a Proposed Rule Change To 
Specify Procedures Available to Issuers of Securities Deposited at DTC 
for Book Entry Services When DTC Imposes or Intends To Impose 
Restrictions on the Further Deposit and/or Book Entry Transfer of Those 
Securities

March 19, 2014.
    On December 5, 2013, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-DTC-2013-11 (``Proposed Rules'') pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Exchange Act'') \1\ 
and Rule 19b-4 thereunder.\2\ The Proposed Rules were published in the 
Federal Register on December 24, 2013.\3\ The Commission received nine 
comments from seven commenters to the Proposed Rules and two letters 
from DTC responding to those comments.\4\ On February 10, 2014, DTC 
filed Amendment No. 1 to the Proposed Rules. On March 10, 2014,

[[Page 16393]]

DTC filed Amendment No. 2 to the Proposed Rules.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Release No. 34-71132 (Dec. 18, 2013); 78 FR 77755 (Dec. 
24, 2013).
    \4\ See Letters to Elizabeth M. Murphy, Secretary, Commission 
from: Suzanne H. Shatto dated December 20, 2013 (``Shatto Letter''); 
Simon Kogan dated December 22, 2013 (``Kogan Letter''); DTCC BigBake 
dated December 27, 2013 (``DTCC BigBake Letter I'') and March 14, 
2014 (``DTCC BigBake Letter II''); Brenda Hamilton, Hamilton & 
Associates Law Group, PA (``Hamilton Letter''); Charles V. Rossi, 
Chairman, STA Board Advisory Committee, Securities Transfer 
Association dated January 14, 2014 (``STA Letter''); Louis A 
Brillemen, Louise A. Brilleman, P.C. dated January 14, 2014 
(``Brilleman Letter''); Gary Emmanuel and Harvey Kesner, Sichenzia 
Ross Friedman Ference LLP dated January 14, 2014 (``Sichenzia Letter 
I'') and February 24, 2014 (``Sichenzia Letter II''); and Isaac 
Montal, Managing Director and Deputy General Counsel, DTCC dated 
February 10, 2014 (``DTC Letter I'') and March 3, 2014 (``DTC Letter 
II'').
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    The Commission is publishing this notice and order to solicit 
comments on Amendment Nos. 1 and 2 from interested persons and to 
institute proceedings under Section 19(b)(2)(B) of the Exchange Act \5\ 
to determine whether to approve or disapprove the Proposed Rules. The 
institution of proceedings does not indicate that the Commission has 
reached any conclusions with respect to any of the issues involved, nor 
does it mean that the Commission will ultimately disapprove the 
Proposed Rules. Rather, the Commission seeks and encourages interested 
persons to provide additional comment on the Proposed Rules to inform 
the Commission's analysis of whether to approve or disapprove the 
Proposed Rules.
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    \5\ 15 U.S.C. 78s(b)(2)(B).
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I. Background

    The Proposed Rules specify procedures available to issuers of 
securities deposited at DTC when DTC blocks or intends to block the 
deposit of additional securities of a particular issue (``Deposit 
Chill'') \6\ or prevents or intends to prevent deposits and restrict 
book-entry and related depository services of a particular issue 
(``Global Lock'').
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    \6\ Securities subject to a Deposit Chill remain eligible for 
book-entry transfer at DTC.
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A. International Power

    DTC filed the Proposed Rules in response to the Commission's 
opinion in In the Matter of International Power Group, Ltd. 
(``International Power'').\7\ In International Power, the Commission 
held that issuers were entitled to ``fair procedures'' under Section 
17A(b)(3)(H) when a clearing agency restricts or denies them access to 
services.\8\ In addition, the Commission stated that it believes ``DTC 
should adopt procedures that accord with the fairness requirements of 
Section 17A(b)(3)(H), which may be applied uniformly in any future such 
issuer cases.'' \9\ Those procedures must also comply with Section 
17A(b)(5)(B) of the Exchange Act, which requires clearing agencies when 
prohibiting or limiting a person's access to services, to (1) notify 
such person of the specific grounds for the prohibition or limitation, 
(2) give the person an opportunity to be heard upon the specific 
grounds for the prohibition or limitation, and (3) keep a record.\10\
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    \7\ Int'l Power Group, Ltd., Securities Exchange Act Rel. No. 
66611 (Mar. 15, 2012), 2012 SEC LEXIS 844.
    \8\ Int'l Power, 2012 SEC LEXIS 844, at *16. The Commission also 
held that the Commission has jurisdiction under Section 19(f) of the 
Exchange Act to review an issuer's appeal of a suspension or 
limitation on access to a clearing agency's services. The Commission 
remanded the case to DTC to provide fair procedures.
    \9\ Int'l Power, 2012 SEC LEXIS 844, at *32.
    \10\ Int'l Power, 2012 SEC LEXIS 844, at *24.
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    However, the Commission also acknowledged a clearing agency's need 
to act to avert ``imminent harm.'' \11\ The Commission stated a 
clearing agency may justifiably impose a suspension of services in 
advance of providing the issuer with notice and an opportunity to be 
heard.\12\ In such circumstances, a clearing agency's procedures 
``should balance the identifiable need for emergency action with the 
issuer's right to fair procedures'' and any suspension could not be 
maintained ``indefinitely without providing expedited fair process to 
the affected issuer.'' \13\
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    \11\ Int'l Power, 2012 SEC LEXIS 844, at *29.
    \12\ Int'l Power, 2012 SEC LEXIS 844, at *29.
    \13\ Int'l Power, 2012 SEC LEXIS 844, at *29.
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B. DTC's Role Under Section 17A of the Exchange Act

    DTC is the nation's central securities depository, registered as a 
clearing agency under Section 17A of the Exchange Act.\14\ DTC performs 
services and maintains securities accounts for its participants, 
primarily banks and broker dealers (``Participants'').\15\ Participants 
may present a security \16\ to be made eligible for DTC's depository 
and book-entry services. If DTC accepts the security as eligible for 
those services and the security is deposited with DTC for credit to the 
securities account of a Participant, it becomes an ``Eligible 
Security.'' \17\ Thereafter, other Participants may deposit that 
Eligible Security into their respective DTC accounts. Once the Eligible 
Security is credited to the account of one or more Participants, 
interests in that Eligible Security may be transferred among 
Participants by book-entry in accordance with the DTC Rules and 
Procedures.
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    \14\ See Securities Exchange Act Release No. 20221 (Sept. 23, 
1983), 48 FR 45167 (Oct. 3, 1983).
    \15\ See 15 U.S.C. 78c(a)(24).
    \16\ ``Security'' is defined in DTC's rules as follows: The term 
``Security'' has the meaning given to the term ``financial asset'' 
in Section 8-102 of the [Uniform Commercial Code of New York]. Any 
item credited to an Account (by the act of being credited to the 
Account) shall be deemed a Security under these Rules and shall be 
treated as a financial asset under Article 8 of the [Uniform 
Commercial Code of New York]. A Security may be an Eligible 
Security, a Deposited Security, a Pledged Security, a Segregated 
Security or an MMI Security, or some or all of them collectively, as 
the context may require. The term ``Security'' shall not include 
Preferred Stock. See DTC Rule 1.
    \17\ Eligible Security is defined in DTC's rules as ``a Security 
accepted by the Corporation, in its sole discretion, as an Eligible 
Security. The Corporation shall accept a Security as an Eligible 
Security only (a) upon a determination by the Corporation that it 
has the operational capability and can obtain information regarding 
the Security necessary to permit it to provide its services to 
Participants and Pledgees when such Security is Deposited and (b) 
upon such inquiry, or based upon such criteria, as the Corporation 
may, in its sole discretion, determine from time to time. The timing 
of additions of such issues shall be on a nondiscriminatory basis 
consistent with the Corporation's objective to provide the maximum 
practical degree of service in facilitating the prompt and orderly 
settlement of Securities transactions.'' See DTC Rule 1 and DTC Rule 
5, Section 1.
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    As provided in the DTC Rules and Procedures, DTC processes the 
transfer of interests in Eligible Securities among DTC Participants by 
credits and debits to Participant accounts in accordance with the 
instructions of delivering and receiving Participants who are parties 
to the transaction. DTC Participants agree to be bound by DTC's Rules 
and Procedures as a condition of membership.
    To facilitate book-entry transfer and other services that DTC 
provides for its Participants with respect to Deposited Securities,\18\ 
Eligible Securities are registered on the books of the issuer 
(typically, in a register maintained by a transfer agent) in DTC's 
nominee name, Cede & Co. DTC maintains Eligible Securities of an issue 
in fungible bulk so that each Participant with an interest in the 
security has a pro rata interest in DTC's entire inventory of that 
issue, but none of the securities on deposit is identifiable to or 
owned by any particular Participant.\19\
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    \18\ Deposited Security is defined in DTC's rules as ``an 
Eligible Security credited to the Account of a Participant by 
Deposit or Delivery. A Deposited Security shall cease to be such if 
it becomes a Pledged Security or is Withdrawn.'' See DTC Rule 1.
    \19\ See Securities Exchange Act Release No. 19678 (Apr. 15, 
1983), 48 FR 17603, 17605, n.5 (Apr. 25, 1983) (describing fungible 
bulk); see also N.Y. Uniform Commercial Code, Sec.  8-503, Off. Cmt 
1 (``. . . all entitlement holders have a pro rata interest in 
whatever positions in that financial asset the [financial] 
intermediary holds'').
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    DTC's deposit and book-entry transfer services facilitate the 
operation of the nation's securities markets. By serving as registered 
holder of trillions of dollars of securities, DTC processes the 
enormous volume of daily securities transactions by the book-entry 
movement without the need to transfer physical certificates.

C. DTC Eligibility Standards

    DTC's Rules and Procedures authorize DTC to determine whether to 
accept a security as an Eligible Security and when an Eligible Security 
will cease to be such.\20\ They also provide that DTC ``may limit 
certain services to particular

[[Page 16394]]

issues of Eligible Securities.'' \21\ The standards for determining 
whether a security is an Eligible Security are as follows: \22\
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    \20\ See DTC Rule 5.
    \21\ See DTC Rule 6.
    \22\ See DTC's Operational Arrangements, Section I.A.2.

    Generally, the issues that may be made eligible for DTC's book-
entry delivery, settlement and depository services are those that 
have been issued in a transaction that: (i) Has been registered with 
the Commission pursuant to the Securities Act of 1933 (``Securities 
Act''); (ii) was exempt from registration pursuant to a Securities 
Act exemption that does not involve (or, at the time of the request 
for eligibility no longer involves) transfer or ownership 
restrictions; or (iii) permits resale of the securities pursuant to 
Rule 144A or Regulation S and in all cases such securities otherwise 
---------------------------------------------------------------------------
meet DTC's eligibility criteria.

    Thus, an essential element of DTC eligibility is that the 
securities are ``freely tradeable'' or, if restricted by Rule 144A \23\ 
or Regulation S under the Securities Act, are processed through a 
separate program in which Participants acknowledge and agree to comply 
with the applicable restrictions.
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    \23\ 17 CFR 230.144A.
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    In determining whether deposited securities satisfy DTC's 
eligibility requirements, DTC may require an issuer to provide an 
opinion from outside counsel in order ``to substantiate the legal basis 
for eligibility.'' \24\ DTC also reserves the right to require an 
opinion of counsel in support of eligibility requirements ``to protect 
DTC and its Participants from risk.'' \25\
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    \24\ The Operational Arrangements further specify that such 
counsel must be ``an experienced securities practitioner, licensed 
to practice law in the relevant jurisdiction and in good standing in 
any bar to which such practitioner is admitted. See DTC Operational 
Arrangements Section I.B.2. Such counsel must be engaged in an 
independent private practice (i.e., not in-house counsel) and may 
not have a beneficial ownership interest in the security for which 
the opinion is being provided or be an officer, director or employee 
of the Issuer.'' See DTC Operational Arrangements Section I.A.1.
    \25\ Id.
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II. Description of the Proposed Rules

A. Proposed Rule 22(A): Deposit Chills

1. Scope of Proposed Rule 22(A)
    Proposed Rule 22(A) sets forth procedures available to issuers of 
Eligible Securities where DTC detects unusually large volumes of 
deposits of a low priced or thinly traded Eligible Security and, as a 
result, determines to impose or intends to impose a Deposit Chill.\26\ 
The procedures will also apply if DTC imposes or intends to impose a 
Deposit Chill pursuant to its obligations under the Securities Act of 
1933 (``Securities Act''), the Bank Secrecy Act (``BSA'') or any rules, 
regulations, or guidance promulgated under the BSA, including rules or 
regulations that the Office of Foreign Asset Control promulgates.\27\
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    \26\ See Proposed Rule 22(A)(1).
    \27\ Proposed Rule 22(A)(3)(b)(iii).
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    However, Proposed Rule 22(A) will not apply when DTC ``impose[s] 
operational restrictions on deposits or other services in connection 
with ordinary course of business processing of Eligible Securities.'' 
\28\ One example of ``ordinary course of business processing'' is the 
processing of corporate actions, including name changes and stock 
splits. It will also not apply to other restrictions in DTC's 
Procedures \29\ that do not constitute a Deposit Chill for purposes of 
Proposed Rule 22(A).
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    \28\ Proposed Rule 22(A)((3)(b)(2).
    \29\ ``Procedures'' means the ``Procedures, service guides, and 
regulations of the Corporation adopted pursuant to Rule 27, as 
amended from time to time.'' See DTC Rule 1. In its filing with the 
Commission, DTC proposed to amend this definition to include 
``operational arrangements.''
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2. Deposit Chill Notice
    DTC will send notice of the Deposit Chill (``Deposit Chill 
Notice'') to an issuer:
     No later than twenty Business Days \30\ prior to the 
imposition of the Deposit Chill or;
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    \30\ ``Business Days'' means any day on which DTC is open for 
business. See DTC Rule 1.
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     No later than three Business Days after imposition of the 
Deposit Chill in the event DTC must first impose the Deposit Chill:
    [cir] ``in order to prevent imminent harm, injury or other such 
consequences to [DTC] or its Participants;'' or
    [cir] if DTC ``reasonably determines that such action is necessary 
to protect the prompt and accurate clearance and settlement of 
securities transactions through [DTC].'' \31\
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    \31\ Proposed Rule 22(A)(2).
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    The Deposit Chill Notice will inform the issuer of the reasons for 
DTC's actions, including the legal authority upon which DTC relies to 
impose the Deposit Chill.\32\ It will also provide the date the Deposit 
Chill was imposed or the date it will be imposed, should the issuer 
fail to respond to the Deposit Chill Notice.\33\
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    \32\ Proposed Rule 22(A)(2)(a)(i).
    \33\ Id.
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3. Deposit Chill Response
    If the issuer elects to contest the Deposit Chill, it may submit a 
response (``Deposit Chill Response'') in the form and containing the 
substance provided in the Deposit Chill Notice.\34\ If the issuer 
demonstrates to DTC's ``reasonable satisfaction'' that the issue 
complies with DTC's eligibility requirements and the applicable 
Procedures,\35\ the Deposit Chill will be lifted or will not be 
imposed. DTC must receive the Deposit Chill Response within twenty 
Business Days after the date of the Deposit Chill Notice. However, DTC 
may extend this deadline for up to an additional twenty Business Days 
if the issuer establishes ``good cause.'' \36\
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    \34\ Proposed Rule 22(A)(2)(a)(ii).
    \35\ See DTC Rule 5.
    \36\ Proposed Rule 22(A)(2)(a)(iv).
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    The Deposit Chill Response must include a legal opinion (``Legal 
Opinion'') from ``an independent securities counsel retained by the 
issuer and reasonably acceptable'' to DTC.\37\ The Legal Opinion must 
establish that the security at issue meets DTC's eligibility 
requirements by showing either that the securities (i) are not 
restricted securities under SEC Rule 144(a)(3),\38\ or (ii) are exempt 
from any restrictions on transferability under the Securities Act.\39\ 
The Legal Opinion must be satisfactory to DTC, but DTC will not 
``unreasonably withhold its acceptance'' if the Legal Opinion 
``includes the material contents of the Template.'' \40\
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    \37\ Proposed Rule 22(A)(2)(a)(iii). In its filing with the 
Commission, DTC stated that in determining whether counsel is 
acceptable for this purpose ``DTC refers to the relevant provisions 
set forth in the Operational Arrangements.'' Those provisions 
provide that counsel must be ``an experienced securities 
practitioner, licensed to practice law in the relevant jurisdiction 
and in good standing in any bar to which such practitioner is 
admitted. Such counsel must be engaged in an independent private 
practice (i.e. not in-house counsel) and may not have a beneficial 
ownership interest in the security for which the opinion is being 
provided or be an officer, director or employee of the Issuer.'' See 
Operational Arrangements, Section I.A.1. A template legal opinion 
(``Template'') will be included with the Deposit Chill Notice.
    \38\ 17 CFR 230.144(a)(3).
    \39\ The eligibility requirements are set forth in DTC Rule 5 
and Section 1 of DTC's Operational Arrangements.
    \40\ Proposed Rule 22(A)(2)(b).
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4. Request for Additional Information
    Upon receiving the Deposit Chill Response, DTC may request 
additional information from the issuer (``Additional Information 
Request''). DTC will set a time frame for the issuer's response to the 
Additional Information Request (``Additional Information Response''), 
but in no case will it be less than ten Business Days from the date of 
the Additional Information Request.
5. Deposit Chill Decision
    If an issuer submits a Deposit Chill Response, DTC will provide the 
issuer

[[Page 16395]]

with a written decision (``Deposit Chill Decision''). An officer of DTC 
who did not have a role in the decision to impose the Deposit Chill 
(``Officer'') will make the Deposit Chill Decision.\41\
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    \41\ ``Officer'' of DTC is defined as ``an Executive Chairman of 
the Board and a Chief Executive Officer, each of whom shall be 
elected by the Board of Directors from among its own number, a Chief 
Operating Officer, one or more Managing Directors, a Secretary, a 
Treasurer, a Comptroller and an Auditor, and may include one or more 
Assistant Secretaries and one or more Assistant Treasurers. The 
officers shall be elected by the Board at the first meeting of the 
Board after the annual meeting of the shareholders in each year. The 
Board may elect or appoint other officers (including, but not 
limited to, a Vice Chairman of the Board, a President and one or 
more Vice Presidents), agents and employees, who shall have such 
authority and perform such duties as may be prescribed by the Board. 
. . . '' See DTC By-Laws Section 3.1.
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Timing of Deposit Chill Decision
    If a Deposit Chill was imposed prior to the issuance of a Deposit 
Chill Notice, the Deposit Chill Decision will be provided within ten 
Business Days after receipt of the Deposit Chill Response or the 
Additional Information Response, if applicable. If a Deposit Chill was 
not imposed prior to the issuance of a Deposit Chill Notice, the 
Deposit Chill Decision will be provided within twenty Business Days 
after receipt of the Deposit Chill Response or the Additional 
Information Response, if applicable.
Effect of Deposit Chill Decision
    The Deposit Chill Decision will result in DTC either: (i) Not 
imposing or releasing a Deposit Chill; or (ii) imposing a Global Lock 
on the security. DTC will not impose a Deposit Chill or will release a 
Deposit Chill already in place ``if the Officer reasonably determines 
that the Deposit Chill Response has established that the securities 
subject thereof satisfy [DTC's] eligibility requirements'' particularly 
that they satisfy DTC's eligibility requirements as set forth in Rule 5 
and Section 1 of DTC Operational Arrangements.
    DTC will intend to impose a Global Lock if the Officer reasonably 
determines that the Deposit Chill Response does not satisfy the 
substantive requirements in the Deposit Chill Notice. DTC will also 
impose a Global Lock if the issuer does not submit a Deposit Chill 
Response within the applicable time period.
    Prior to imposition of the Global Lock in this circumstance, an 
issuer has ten Business Days to submit a supplemental Deposit Chill 
Response (``Supplemental Deposit Chill Response'').\42\ The issuer is 
limited in the Supplemental Deposit Chill Response to demonstrating 
that (1) it did submit the Deposit Chill Response or Additional 
Information Response, if applicable, within the required time frame, or 
(2) DTC made a clerical mistake or a mistake arising from an oversight 
or omission in reviewing the Deposit Chill Response [or Additional 
Information Response, if applicable].\43\ If an issuer submits a 
Supplemental Deposit Chill Response, the Officer will provide the 
issuer with a written decision (``Supplemental Deposit Chill Response 
Decision'') within ten Business Days of its submission.
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    \42\ Proposed Rule 22(A)(c)(iii).
    \43\ Proposed Rule 22(A)(c)(iii).
---------------------------------------------------------------------------

6. The Record
    The record for purposes of any appeal to the Commission will be 
comprised of:
     The Deposit Chill Notice, the Deposit Chill Response, the 
Deposit Chill Decision, the Supplemental Deposit Chill Response, the 
Supplemental Deposit Chill Response Decision, the Additional 
Information Request, and the Additional Information Response;
     All documents submitted in connection with the items 
listed immediately above and;
     Any written communications created pursuant to Proposed 
Rule 22(A)(3)(b)(iv), as described below.\44\
---------------------------------------------------------------------------

    \44\ Proposed Rule 22(A)(b)(3)(iv).
---------------------------------------------------------------------------

7. Waiver of Right To Make Submission
    If an issuer does not comply with any deadline set pursuant to Rule 
22(A) or in a Deposit Chill Notice, it waives its right to make the 
submission unless DTC expressly waives or extends in writing the period 
for submission.\45\
---------------------------------------------------------------------------

    \45\ Proposed Rule 22(A)(2)(a).
---------------------------------------------------------------------------

8. Reservation of Authority
    Once DTC has imposed a Deposit Chill, Proposed Rule 22(A) does not 
prevent it from lifting or modifying the Deposit Chill ``to prevent 
imminent harm, injury or other such consequences to [DTC] or its 
Participants or where [DTC] otherwise reasonably determines that such 
action is necessary to protect the prompt and accurate clearance and 
settlement of securities transactions through DTC.'' \46\ In addition, 
for those same reasons, DTC may impose a Deposit Chill after providing 
an issuer with a Deposit Chill Notice or Additional Information Request 
but before it has received a Deposit Chill Response or Additional 
Information Response without waiting for the applicable deadline to 
arrive.\47\ In such circumstances, after the Deposit Chill is imposed, 
the procedures in Proposed Rule 22(A)(2)(c) will apply. For example, 
DTC will issue the Deposit Chill Decision with ten Business Days after 
receiving the Deposit Chill Response or the Additional Information 
Response, if applicable.\48\
---------------------------------------------------------------------------

    \46\ Proposed Rule 22(A)(3)(b)(i)(A).
    \47\ Proposed Rule 22(A)(3)(b)(i)(B).
    \48\ Proposed Rule 22(A)(3)(c).
---------------------------------------------------------------------------

    Proposed Rule 22(A) also does not prohibit DTC from communicating 
with an issuer, its transfer agent, or other authorized representative 
known to DTC in connection with a Deposit Chill.\49\ As noted above, 
any such substantive communications will be in writing and part of the 
record for purposes of any appeal to the Commission.
---------------------------------------------------------------------------

    \49\ Proposed Rule 22(A)(3)(b)(iv).
---------------------------------------------------------------------------

9. Method of Delivery of Deposit Chill Notice
    DTC will send the issuer any Deposit Chill Notice via overnight 
courier to the issuer's address in its regulatory filings where it is 
incorporated or otherwise organized. If DTC cannot locate the issuer 
with reasonable diligence, it will send it the issuer's designee for 
service of process or the Secretary of State or any state securities 
agency of the State where the issuer is incorporated or otherwise 
organized. If the issuer is not incorporated or otherwise organized in 
any state, DTC will send them to any similar agent of the jurisdiction 
where the issuer is incorporated or otherwise organized.

B. Proposed Rule 22(B)

1. Scope of Proposed Rule 22(B)
    The procedures in Proposed Rule 22(B) apply to issuers of Eligible 
Securities where DTC imposes or intends to impose a Global Lock \50\ in 
conjunction with either of the following:
---------------------------------------------------------------------------

    \50\ Proposed Rule 22(B)(1).
---------------------------------------------------------------------------

     Judicial Action or Administrative Proceeding: DTC becomes 
aware that the Commission or other federal or state law enforcement or 
regulatory authority has commenced a judicial action or administrative 
proceeding (``Proceeding'') alleging that ``Defendants'' \51\ sold 
Eligible Securities in violation of Section 5 of the Securities Act or 
other applicable law.\52\
---------------------------------------------------------------------------

    \51\ Proposed Rule 22(B) defines ``Defendants'' as a defendant, 
defendants, and other subjects of the action.
    \52\ Proposed Rule 22(B)(1)(a).
---------------------------------------------------------------------------

     Deposit Chill: DTC imposes a Global Lock when an issuer 
does not satisfy the requirements of lifting or not imposing a Deposit 
Chill in Rule 22(A)(2)(c)(ii) and (iii).\53\
---------------------------------------------------------------------------

    \53\ Proposed Rule 22(B)(1)(b).

---------------------------------------------------------------------------

[[Page 16396]]

2. Global Lock Notice
    DTC will send notice of the Global Lock (``Global Lock Notice'') to 
an issuer:
     No later than twenty Business Days prior to the imposition 
of the Global Lock \54\ or;
---------------------------------------------------------------------------

    \54\ Proposed Rule 22(B)(2).
---------------------------------------------------------------------------

     no later than three Business Days after imposition of the 
Global Lock in the event DTC must first impose the Global Lock:
    [cir] ``in order to prevent imminent harm, injury or other such 
consequences to [DTC] or its Participants;'' or
    [cir] if DTC ``reasonably determines that such action is necessary 
to protect the prompt and accurate clearance and settlement of 
securities transactions through [DTC].'' \55\
---------------------------------------------------------------------------

    \55\ Proposed Rule 22(B)(2).
---------------------------------------------------------------------------

    The Global Lock Notice will inform the issuer of the reasons for 
DTC's actions, including the legal authority upon which DTC relies.\56\ 
It will also provide the date the Global Lock was imposed or the date 
it will be imposed should the issuer fail to respond to the Global Lock 
Notice.\57\ With respect to the issuer's response, the Global Lock 
Notice will set forth the following: \58\
---------------------------------------------------------------------------

    \56\ Proposed Rule 22(B)(2)(a)(i).
    \57\ Id.
    \58\ Also included with the Global Lock Notice will be a copy of 
Proposed Rule 22(B). See Proposed Rule 22(B)(2)(a)(iv).
---------------------------------------------------------------------------

3. Global Lock Response
    If the issuer elects to contest the Global Lock, it may submit a 
response (``Global Lock Response'') in the form and containing the 
substance provided in the Global Lock Notice. If the Global Lock Notice 
is based on a Proceeding as described in Proposed Rule 22(B)(1)(a), it 
will contain notice that a Global Lock will not be imposed, or, if 
already imposed, will be released if the issuer demonstrates either (1) 
that the Eligible Securities were not the intended subject of the 
Proceeding, or (2) that the Proceeding was withdrawn or dismissed on 
the merits with prejudice or otherwise resolved in a final, non-
appealable judgment in favor of the Defendants.
    DTC must receive the Global Lock Response with twenty Business Days 
after the date of the Global Lock Notice. However, DTC may extend this 
deadline for up to an additional twenty Business Days if the issuer 
establishes ``good cause.''
4. Global Lock Decision
    If an issuer submits a Global Lock Response, DTC will provide the 
issuer with a written decision (``Global Lock Decision'').\59\
---------------------------------------------------------------------------

    \59\ Proposed Rule 22(B)(c).
---------------------------------------------------------------------------

Timing of Global Lock Decision
    If a Global Lock was imposed prior to the issuance of a Global Lock 
Notice, the Global Lock Decision will be provided within ten Business 
Days after receipt of the Global Lock Response. If a Global Lock was 
not imposed prior to the issuance of a Global Lock Notice, the Global 
Lock Decision will be provided within twenty Business Days after 
receipt of the Global Lock Response.
Effect of Global Lock Decision
    The Global Lock Decision will result in DTC either: (i) Not 
imposing or releasing a Global Lock; or (ii) imposing or not releasing 
a Global Lock on the security. DTC will not impose a Global Lock, or 
will release a Global Lock already in place, if it reasonably 
determines that the Global Lock Response satisfies the requirements set 
forth in the Global Lock Notice.\60\ If DTC reasonably determines that 
the Global Lock Response does not satisfy those requirements, it will 
impose or not release the Global Lock, as applicable.
---------------------------------------------------------------------------

    \60\ Proposed Rule 22(B)(2)(c).
---------------------------------------------------------------------------

5. Release of Global Lock Stemming From a Proceeding
    Proposed Rule 22(B)(3) provides for the release of Global Locks 
imposed pursuant to a Proceeding as set forth in Proposed Rule 
22(B)(1)(a). However, if the safe harbor under Securities Act Rule 144 
is not available to the issuer pursuant to Securities Act Rule 
144(i),\61\ the issuer is not eligible for relief under this 
provision.\62\ For those issuers, the Global Lock will remain in place 
until it complies with the requirements of Securities Act Rule 
144(i)(2).\63\
---------------------------------------------------------------------------

    \61\ See 17 CFR 230.144(i).
    \62\ Proposed Rule 22(B)(3).
    \63\ Id.
---------------------------------------------------------------------------

    For all other issuers, the length of the Global Lock will depend in 
the first instance on whether the issuer is subject to the reporting 
requirements of Sections 13(a) and 15(d) of the Exchange Act. If the 
issuer is subject to such requirements, the Global Lock will be lifted 
six months after the ``Disposition.'' \64\ If the issuer is not subject 
to the reporting requirements, the Global Lock will be lifted one year 
after either the entry of a judicial order or judgment or, if the 
Commission brought an administrative proceeding, the Disposition.\65\
---------------------------------------------------------------------------

    \64\ Proposed Rule 22(B)(3)(b). Proposed Rule 22(b)(3)(a)(ii) 
defines ``disposition'' as ``a final order of the Commission 
pursuant to Rule 360(d)(2) or Rule 411(a) of the Commission's Rules 
of Practice that disposes of the claims against those Defendants 
allegedly responsible for the violations of Section 5 of the 
Securities Act relating to the Eligible Securities.
    \65\ Proposed Rule 22(B)(2)(a)(i) and (ii).
---------------------------------------------------------------------------

    Under Section 3 of Proposed Rule 22(B), an issuer may be required 
to submit a Legal Opinion and/or other evidence or documentation as DTC 
may reasonably require.\66\
---------------------------------------------------------------------------

    \66\ Proposed Rule 22(B)(3)(c). As with a Legal Opinion 
regarding a Deposit Chill Notice, any Legal Opinion an issuer 
submits regarding a Global Local Notice must be in a form and 
substance satisfactory to DTC and be from an independent securities 
counsel reasonably acceptable to DTC. Id.
---------------------------------------------------------------------------

6. Release of a Global Lock Stemming From a Deposit Chill Under 
Proposed Rule 22(A)(2)(c)
    Section 4 of Proposed Rule 22(B) provides for the release of Global 
Locks imposed when an issuer fails to satisfy the requirements for 
lifting a Deposit Chill in Sections 2(c)(ii) and (iii) of Proposed Rule 
22(A). Like Section 3 of Proposed Rule 22(B), the length of the Global 
Lock will depend on whether the issuer is subject to the reporting 
requirements under Section 13 or Section 15(d) under the Exchange Act. 
If the issuer is such a reporting company, the Global Lock will be 
lifted six months after its imposition.\67\ If the issuer is not such a 
reporting company, the Global Lock will be lifted one year after its 
imposition.\68\ As in Section 3 of Proposed Rule 22(B), a Global Lock 
will remain in place for those issuers for which the safe harbor under 
Securities Act Rule 144 would be unavailable pursuant to Rule 144(i) 
until the issuer complies with the requirements of Securities Act Rule 
144(i)(2).\69\
---------------------------------------------------------------------------

    \67\ Proposed Rule 22(B)(4).
    \68\ Id.
    \69\ Id.
---------------------------------------------------------------------------

7. Record
    The record for purposes of any appeal to the Commission consists of 
the Global Lock Notice, the Global Lock Response, and the Global Lock 
Decision.\70\
---------------------------------------------------------------------------

    \70\ Proposed Rule 22(B)(2)(d).
---------------------------------------------------------------------------

8. Waiver of Right To Make Submission
    If an issuer does not comply with any deadline set pursuant to Rule 
22(B) or in a Global Lock Notice, it waives its right to make the 
submission unless DTS expressly waives or extends in writing the period 
for submission.\71\
---------------------------------------------------------------------------

    \71\ Proposed Rule 22(B)(5)(a).
---------------------------------------------------------------------------

9. Reservation of Authority
    Once DTC has imposed a Global Lock, Proposed Rule 22(B) does not 
prevent it from lifting or modifying the Global Lock ``to prevent 
imminent harm, injury or other such consequences to [DTC] or

[[Page 16397]]

its Participants or where [DTC] otherwise reasonably determines that 
such action is necessary to protect the prompt and accurate clearance 
and settlement of securities transactions through [DTC].'' \72\ In 
addition, for those same reasons, DTC may impose a Global Lock after 
providing an issuer with a Global Lock Notice but before it has 
received a Global Lock Response before the applicable deadline.\73\ In 
such circumstances, after the Global Lock is imposed, the procedures in 
Section 2(c) of Proposed Rule 22(B) will apply. For example, DTC will 
issue the Global Lock Decision with ten Business Days after receiving 
the Global Lock Response.\74\
---------------------------------------------------------------------------

    \72\ Proposed Rule 22(B)(5)(b)(i)(A).
    \73\ Proposed Rule 22(A)(5)(b)(i)(B).
    \74\ Proposed Rule 22(B)(5)(c).
---------------------------------------------------------------------------

    Proposed Rule 22(B) also does not prohibit DTC from communicating 
with an issuer, its transfer agent of other authorized representative 
known to DTC in connection with a Global Lock.\75\ As noted above, any 
such substantive communications will be in writing and part of the 
record for purposes of any appeal to the Commission.
---------------------------------------------------------------------------

    \75\ Proposed Rule 22(B)(5)(b)(iv).
---------------------------------------------------------------------------

    In addition, nothing in Proposed Rule 22(B) displaces any legal or 
regulatory requirements that DTC is subject to under applicable law, 
rule or regulation.\76\ If DTC imposes a Global Lock for reasons other 
than those described in Proposed Rule 22(B), it will, however, apply 
the procedures set forth in Proposed Rule 22(B).\77\
---------------------------------------------------------------------------

    \76\ Proposed Rule 22(B)(5)(b)(iii).
    \77\ Id.
---------------------------------------------------------------------------

10. Method of Delivery of Global Lock Notice
    DTC will send the issuer any Global Lock Notice via overnight 
courier to the issuer's address in its regulatory filings where it is 
incorporated or otherwise organized.\78\ If DTC cannot locate the 
issuer with reasonable diligence, it will send them to the issuer's 
designee for service of process or the Secretary of State or any state 
securities agency of the State where the issuer is incorporated or 
otherwise organized.\79\ If the issuer is not incorporated or otherwise 
organized in any state, DTC will send them to any similar agent of the 
jurisdiction where the issuer is incorporated or otherwise 
organized.\80\
---------------------------------------------------------------------------

    \78\ Proposed Rule 22(B)((5)(c).
    \79\ Id.
    \80\ Id.
---------------------------------------------------------------------------

III. Summary of Comments and DTC's Responses

    The Commission received nine comment letters from seven commenters 
on the Proposed Rules. DTC submitted two letters responding to 
comments. The summary of comments and DTC's responses are organized 
into three categories: (i) Notice to issuers, (ii) opportunity to be 
heard, and (iii) fair procedures.\81\
---------------------------------------------------------------------------

    \81\ Two commenters argued about that the scope of the Proposed 
Rules should be broader. Both of these commenters interpret Proposed 
Rule 22(A) to apply only when DTC imposes a Deposit Chill upon 
detecting ``unusually large volumes of deposits of a low priced or 
thinly traded Eligible Security.'' See STA Letter at 3-4; Sichenzia 
Letter I at 3. One of these commenters interprets Proposed Rule 
22(B) to apply only when DTC becomes aware of a judicial or 
administrative proceeding or when an issuer has failed to meet the 
threshold for lifting a Deposit Chill. See Sichenzia Letter at 3. 
DTC responded that the Proposed Rules are broader than the 
commenters' interpretation. See DTC Letter I at 13-14 (citing 
Proposed Rule 22(A)(3)(b)(iii) and Proposed Rule 22(B)(5)(b)(iii)).
    One commenter believes the Proposed Rules should apply to other 
persons using DTC's services, including transfer agents. See STA 
Letter at 7-8.
---------------------------------------------------------------------------

A. Notice to Issuers

1. Comments Regarding Meaning of ``Imminent Harm''
    One commenter believes that DTC's ability to impose a Deposit Chill 
or Global Lock ``to prevent imminent harm, injury or other such 
consequences to [DTC] or its Participants, or where [DTC] otherwise 
reasonably determines that such action is necessary to protect the 
prompt and accurate clearance and settlement of securities transactions 
through [DTC]'' is overly broad, ripe for abuse, and has the potential 
to render the advance notice procedure meaningless.\82\
---------------------------------------------------------------------------

    \82\ See Sichenzia Letter I at 4.
---------------------------------------------------------------------------

    Commenters also question what constitutes ``imminent harm'' and 
requests that DTC clarify the term.\83\ One commenter believes DTC 
should be required to clearly outline the minimum showing of imminent 
harm that would be needed to justify the imposition of a restriction 
prior to providing the issuer with notice.\84\ This commenter requests 
that DTC develop procedures for an expedited proceeding that should 
mirror FINRA Rule 9552.\85\ One commenter does not believe that Section 
17A authorizes DTC to restrict an issuer's access to its facilities 
without prior notice.\86\
---------------------------------------------------------------------------

    \83\ See Sichenzia Letter I at 4; Kogan Letter at 3.
    \84\ See Kogan Letter at 3.
    \85\ See Kogan Letter at 3.
    \86\ See Kogan Letter at 2.
---------------------------------------------------------------------------

    One commenter does not believe that the Proposed Rules require DTC 
to articulate what the ``imminent harm'' is in the Deposit Chill 
Notice, but rather only provide notice of the restriction and the 
reasons for the restriction. The commenter recommends that DTC be 
required to articulate the potential risks and who faces those 
risks.\87\
---------------------------------------------------------------------------

    \87\ See Kogan Letter at 3.
---------------------------------------------------------------------------

    DTC responds that it ``has provided meaningful standards to justify 
imposition of restrictions in those cases where prior notice is not 
feasible.'' \88\ It cites to International Power where the Commission 
stated that DTC may impose restrictions prior to providing notice 
``[i]f DTC believes that circumstances exist that justify imposing an 
suspension of services with respect to an issuer's securities in 
advance of being able to provide the issuer with notice and an 
opportunity to be heard on the suspension.'' The Commission further 
stated that DTC may act to avoid imminent harm, but it must then 
provide ``expedited fair process to the affected issuer.'' \89\
---------------------------------------------------------------------------

    \88\ See DTC Letter I at 8.
    \89\ Int'l Power, 2012 SEC LEXIS 844, at *29.
---------------------------------------------------------------------------

    DTC explains that ``[w]hen its monitoring system detects that 
Participants may be in the process of currently and consistently 
depositing ineligible securities into the system, DTC may impose a 
Deposit Chill without prior notice to stop further deposits of such 
ineligible securities.'' \90\ It also believes that Rule 22(A) provides 
issuers with expedited fair process. Based on its experience using the 
procedures in the Proposed Rule Change over the past months, DTC notes 
that in the ``majority of cases'' it has provided notice to issuers 
prior to imposing a Deposit Chill.\91\
---------------------------------------------------------------------------

    \90\ See DTC Letter I at 9.
    \91\ See DTC Letter I at 9.
---------------------------------------------------------------------------

    With respect to Global Locks, DTC believes it is able to institute 
them as soon as possible once the Commission alleges that the proffered 
exemption and all other possible exemptions are not applicable.\92\ As 
with Deposit Chills, over the past months DTC has provided notice to 
issuers prior to imposing a Global Lock in a majority of cases.\93\
---------------------------------------------------------------------------

    \92\ See DTC Letter I at 9.
    \93\ See DTC Letter I at 9.
---------------------------------------------------------------------------

2. Comments Regarding the Deposit Chill Notice
    One commenter believes that in order for issuers to have the 
opportunity to fully understand and respond to the issues raised in the 
Deposit Chill Notice, DTC must provide in the Deposit Chill Notice the 
reasons for the Deposit Chill or Global Lock in light of DTC's 
Eligibility Requirements.\94\ DTC responds that the Proposed Rule 
change requires the Deposit Chill Notice and the Global Lock Notice to 
contain the

[[Page 16398]]

reasons for the service restriction and provide the required form of 
response.\95\
---------------------------------------------------------------------------

    \94\ See STA Letter at 4.
    \95\ See DTC Letter I at 12.
---------------------------------------------------------------------------

    One commenter believes that the named transfer agent of an issuer 
should also receive the Deposit Chill Notice and the Global Lock 
Notice. This commenter states that providing notice to the transfer 
agent would allow it to protect the interests of other registered 
shareholders of the issuer, as well as its own interests.\96\ Another 
commenter does not believe that notice to a transfer agent is 
reasonably calculated to provide notice to the issuer, and instead 
suggests notice be given to the registered agent for service of process 
or the Secretary of State in the state of incorporation.\97\
---------------------------------------------------------------------------

    \96\ See STA Letter at 6. This commenter stated that the 
Commission has increasingly sought to impose obligations on transfer 
agents in this area and has expressed that transfer agents may fact 
liability under Section 5 of the Securities Act in some 
circumstances.
    \97\ See Kogan Letter at 4.
---------------------------------------------------------------------------

    One commenter also believes that DTC should give contemporaneous 
notice to the Commission. It believes this is necessary in order for 
the issuer to be able to seek a ``stay of the restriction.'' \98\ DTC 
responds that it does not need to replicate in its rules the 
Commission's Rules of Practice.\99\ Another commenter believes that DTC 
should be required to notify law enforcement if it notices ``a pattern 
by depositors.'' \100\
---------------------------------------------------------------------------

    \98\ See Kogan Letter at 3.
    \99\ See DTC Letter I at 12 (citing Rule 420(b) of the 
Commission's Rule of Practice, 17 CFR 201.420).
    \100\ See Shatto Letter at 1.
---------------------------------------------------------------------------

B. Opportunity To Be Heard

1. Comments Requesting an Opportunity for an In-Person Hearing and 
Internal Appeal
    Three commenters believe that Section 17A of the Exchange Act 
requires DTC to provide affected issuers the opportunity to request a 
hearing to appeal the decision to institute a Deposit Chill or Global 
Lock within DTC.\101\ Commenters cite to other SRO rules that afford 
affected parties the opportunity for a hearing in similar contexts, 
specifically, FINRA Rule 6490 and NASDAQ Rule 5815.\102\
---------------------------------------------------------------------------

    \101\ See STA Letter at 5; Sichenzia Letter I at 2; Sichenzia 
Letter II at 2; Kogan Letter at 4-5. One of these commenters 
requests ``a hearing or an internal appeals process that is 
meaningful.'' See Sichenzia Letter II at 2.
    \102\ See STA Letter at 5; Sichenzia Letter II at 2.
---------------------------------------------------------------------------

    Commenters also note that DTC Rule 22 permits issuers to contest 
any decision to deny their status as an Eligible Security by filing a 
request for a hearing. Such a hearing takes place before three members 
of a panel selected by the Chairman of the Board of the Depository 
Trust and Clearing Corporation, the parent company of DTC, from a pool 
of persons employed by or partners of Participants.\103\ One commenter 
notes that in the event that an issuer is subject to a Deposit Chill or 
a Global Lock, the effect of that decision by DTC is the same as though 
it has been denied status as an Eligible Security. As a result, this 
commenter argues that issuers should be afforded a hearing, just as 
they are under Rule 22.\104\
---------------------------------------------------------------------------

    \103\ See STA Letter at 5; Sichenzia Letter I at 3.
    \104\ See STA Letter at 5. Commenters recommend allowing issuers 
to use the hearing process outlined in Rule 22. See STA Letter at 5; 
Sichenzia Letter I at 3. One of these commenters also recommends 
Rule 22 be amended to provide that the three person panels that hear 
appeals from decisions made by DTC be comprised of one person that 
is employed by, or a partner of, a registered transfer agent. See 
STA Letter at 5-6.
---------------------------------------------------------------------------

    Another commenter similarly believes issuers must be afforded a 
hearing like those provided under DTC Rule 22.\105\ This commenter 
believes the Commission thought the issuer in International Power 
should have been given a hearing, although the commenter notes the 
Commission never held that DTC is required to provide a hearing.\106\ 
The commenter points to the following statement from the Commission's 
opinion: ``DTC has not articulated an adequate rationale for providing 
a hearing to an issuer for whose securities DTC will provide no 
service, but not to an issuer whose securities are denied those 
clearance and settlement services that go to the heart of DTC's role as 
a clearing agency.'' \107\ The commenter also believes that the 
Commission's references to FINRA Rule 9558, which requires a hearing, 
supports its position that the Commission intended for DTC to provide 
issuers a hearing.\108\
---------------------------------------------------------------------------

    \105\ See Sichenzia Letter II at 2.
    \106\ See Sichenzia Letter II at 2.
    \107\ See Sichenzia Letter II at 2 (citing Int'l Power, 2012 SEC 
LEXIS 844, at *20).
    \108\ See Sichenzia Letter II at 2.
---------------------------------------------------------------------------

    In response to these comments, DTC states that while Section 
17A(b)(3)(H) requires DTC to provide persons with fair procedures when 
restricting services and Section 17A(b)(5)(B) requires that fair 
procedures include notice and an opportunity to be heard, nothing in 
17A requires DTC to provide issuers with an in-person testimonial 
hearing.\109\ DTC also provides that the Commission's opinion in 
International Power did not specify the procedures DTC should apply, 
but rather stated that DTC should ``adopt procedures that accord with 
the fairness requirements of Section 17A(b)(3)(H), which may be applied 
uniformly in any future such cases.'' \110\ DTC also notes that even 
though the Commission refers to DTC Rule 22 in International Power, it 
did not state that DTC should apply those procedures when instituting 
Deposit Chills or Global Locks.\111\
---------------------------------------------------------------------------

    \109\ See DTC Letter I at 2-3.
    \110\ Id.
    \111\ Id.
---------------------------------------------------------------------------

    With respect to the procedures in FINRA Rule 6490 and NASDAQ Rule 
5815, DTC responds that it has a different role in the securities 
industry than FINRA and NASDAQ.\112\ It notes that FINRA and NASDAQ 
have disciplinary and adjudicatory mandates ``to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade. . . .'' \113\ DTC provides that it ``does not 
perform a policing function to root out fraudulent and manipulative 
conduct in violation of the securities laws.'' \114\ DTC therefore 
concludes that ``[t]here is no basis to compare FINRA and NASDAQ's 
adjudicatory procedures arising from their policing functions with the 
fair procedures provided by DTC for compliance with its eligibility 
standards.'' \115\
---------------------------------------------------------------------------

    \112\ See DTC Letter I at 5.
    \113\ See DTC Letter I at 5 (citing Exchange Act Sections 
15A(b)(6) and 6(b)(5)).
    \114\ See DTC Letter I at 5.
    \115\ See DTC Letter I at 5. DTC also characterizes FINRA Rule 
6490 and NASDAQ Rule 5815 as ``appeals from fact-intensive 
determinations.'' It contrasts this with the Proposed Rule Change, 
which it states does not contemplate that DTC will engage in 
independent fact finding. See DTC Letter I at 7.
---------------------------------------------------------------------------

    With respect to commenter's assertions that the Commission's 
opinion in International Power, and specifically its references to 
FINRA Rule 9558, indicates a hearing is required, DTC notes the 
Commission's statement that ``DTC may design such processes in 
accordance with its own internal needs and circumstances.'' \116\ In 
addition, DTC provides that the reference to FINRA Rule 9558 was 
regarding notice and expedited fair process where action is necessary 
to avoid imminent harm.\117\
---------------------------------------------------------------------------

    \116\ See DTC Letter II at 2.
    \117\ See DTC Letter II at 2.
---------------------------------------------------------------------------

2. Comments Regarding Due Process
    One commenter questions whether DTC's procedures provide issuers 
with due process, and specifically the ``opportunity to present its 
objections to the allegations that form the justification for the 
restriction.'' \118\ It believes DTC should allow the issuer to 
``litigate'' the issues raised in the regulatory

[[Page 16399]]

proceeding that forms the basis of a Global Lock.\119\
---------------------------------------------------------------------------

    \118\ See Kogan Letter at 4.
    \119\ See Kogan Letter at 4.
---------------------------------------------------------------------------

    DTC responds by stating that Section 17A establishes its 
obligations, not the Fourteenth Amendment's due process clause.\120\ It 
further states that even if due process standards did apply, the 
Proposed Rules meets those standards; due process does not require an 
evidentiary or in-person hearing.\121\
---------------------------------------------------------------------------

    \120\ See DTC Letter I at 4.
    \121\ Id.
---------------------------------------------------------------------------

C. Fair Procedures

1. Comment Regarding Requirement To Provide a Legal Opinion
    One commenter is concerned that Proposed Rule 22(A) gives DTC the 
authority to require a Legal Opinion covering any issuer security 
deposited at any time rather than only those securities deposited over 
the specific time frames that are the subject of concern.\122\ This 
commenter states that this open-ended inquiry imposes an unfair burden 
on issuers.\123\
---------------------------------------------------------------------------

    \122\ See Sichenzia Letter I at 5.
    \123\ See Sichenzia Letter I at 5.
---------------------------------------------------------------------------

2. Comments Regarding Disproportionate Burden on Smaller Issuers
    Commenters note that most of the issuers affected by DTC's actions 
with respect to the imposition of a Deposit Chill or Global Lock will 
likely be small and midsize companies, and that Restraints of DTC 
services can dramatically affect the lives of the officers, directors, 
and shareholders of these companies.\124\ For this reason, two 
commenters believe that DTC must ensure a fair process that will reduce 
the likelihood of harm to innocent parties--including the issuer and 
its investors.\125\
---------------------------------------------------------------------------

    \124\ See STA Letter at 2; Sichenzia Letter I at 6.
    \125\ See STA Letter at 2.
---------------------------------------------------------------------------

    One commenter questions why Sections 3 and 4 of Proposed Rule 22(B) 
adversely treats former shell companies and believes they should be 
treated the same as any other public companies.\126\
---------------------------------------------------------------------------

    \126\ See Sichenzia Letter I at 6.
---------------------------------------------------------------------------

3. Comments Regarding Timing for Lifting a Deposit Chill
    One commenter believes that the timing for lifting a Deposit Chill 
as compared to a Global Lock is counter-intuitive.\127\ According to 
this commenter, a Global Lock, which is typically imposed as a result 
of enforcement proceedings, should not be easier to remedy than a 
Deposit Chill, which is usually imposed based on ``mere'' concerns 
regarding a security's eligibility.\128\ The commenter recommends that 
Deposit Chills be lifted automatically after a certain period of 
time.\129\
---------------------------------------------------------------------------

    \127\ See Brilleman Letter at 2.
    \128\ See Brilleman Letter at 2.
    \129\ See Brilleman Letter at 2.
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    One commenter is concerned that the Proposed Rules do not address 
cases of issuers whose securities were subjected to a Deposit Chill 
prior to the Commission's opinion in International Power.\130\ This 
commenter suggests Deposit Chills imposed prior to International Power 
be lifted after a certain period of time or DTC should follow 
procedures to make a ``fairness determination'' based on the facts and 
circumstances of a particular case.\131\ In its response, DTC states 
that if an issuer whose securities were restricted prior to 
International Power requests a review, DTC has been following the 
procedures in the Proposed Rules.\132\
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    \130\ See Brilleman Letter at 1.
    \131\ See Brilleman at 1.
    \132\ See DTC Letter I at 13.
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4. Comments Regarding Timing for Lifting a Global Lock
    Under Proposed Rule 22(B), the trigger for releasing a Global Lock 
is the resolution of the regulatory matter in a judicial order or an 
administrative decision (or some other indication that the issuer was 
incorrectly identified in the Proceeding). One commenter believes this 
standard is not workable because matters instituted by regulatory 
agencies may not be resolved for many years, if at all, may not be 
resolved in a formal fashion, and may be resolved only regarding some 
Defendants or some claims.\133\ The commenter recommends that issuers 
affected by a Global Lock or a Deposit Chill should be permitted to 
apply to DTC one year after the imposition of any Deposit Chill or 
Global Lock to have their affected securities declared Eligible 
Securities.\134\ This application could include a Legal Opinion that 
DTC may rely upon, and DTC could afford issuers a hearing under DTC 
Rule 22 should DTC determine not to release the relevant restriction 
based on the Legal Opinion.\135\
---------------------------------------------------------------------------

    \133\ See STA Letter at 6.
    \134\ See STA Letter at 7.
    \135\ See STA Letter at 7.
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    Another commenter argued that the timing for the release of a 
Global Lock is too long and stated ``it would be a near miracle if a 
public company in need of working capital were able to survive through 
years of being subject to a [G]lobal [L]ock.'' \136\ This commenter 
recommended lifting a Global Lock six months or one year after the 
commencement of an enforcement proceeding, and believes at such time 
the burden is on the Commission to take action to suspend any further 
trading in the issuer's securities.\137\
---------------------------------------------------------------------------

    \136\ See Sichenzia Letter I at 5.
    \137\ See Sichenzia Letter I at 5.
---------------------------------------------------------------------------

5. Comments Regarding Public Notice of Deposit Chills and Global Locks
    Two commenters recommend that DTC make a list of companies subject 
to Deposit Chills and Global Locks publicly available on its Web 
site.\138\ Commenters stated that issuers subject to these restrictions 
often do not inform their shareholders or potential investors and at 
times issuers misrepresent the reasons for the imposition of the 
restrictions in order to continue raising capital.\139\ These 
commenters also believe publicizing which issuers are subject to DTC 
restrictions would deter future fraudulent securities sales and protect 
investors.\140\
---------------------------------------------------------------------------

    \138\ See Hamilton Letter at 1; DTCC BigBake Letter I at 1; DTCC 
BigBake Letter II at 1.
    \139\ See Hamilton Letter at 1; DTCC BigBake Letter I at 1.
    \140\ See Hamilton Letter at 1; DTCC BigBake Letter I at 1.
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    One investor also states that publication of issuer and DTC 
responses would be beneficial to shareholders and potential 
investors.\141\ Another commenter requests the publication of Legal 
Opinions, arguing that this would reduce the number of restrictions and 
reduce the impact on the market.\142\
---------------------------------------------------------------------------

    \141\ See Hamilton Letter at 1.
    \142\ See DTCC BigBake Letter I at 2.
---------------------------------------------------------------------------

    DTC states that while it understands commenters concerns, it is the 
issuer's responsibility to decide whether to disclose all of this 
information.\143\ DTC issues an Important Notice when imposing a Global 
Lock and those Important Notices are published on DTC's Web site.\144\ 
In its response, DTC provides that it is considering whether similar 
disclosures regarding Deposit Chills would be appropriate.\145\
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    \143\ See DTCC Letter at 12.
    \144\ See DTCC Letter at 12.
    \145\ See DTCC Letter at 12.
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6. Comment Regarding Persons Authorized To Initiate Process and Make 
Final Determinations
    One commenter expressed concern over the number of individuals who 
would be ``Officers'' under the Proposed Rules, and thus able to make 
decisions to deny an issuer access to DTC.\146\ This commenter stated 
any such decisions ``should be given serious and formal consideration 
by senior, experienced professionals that are familiar with securities 
markets and the federal

[[Page 16400]]

securities laws, and that have the authority and independent to make 
decisions.'' \147\ With respect to independence, this commenter 
recommends that an Officer making these decisions should be in a 
separate reporting line or senior to the Officer who made the initial 
decision. Along these lines, the commenter believes the Board of 
Directors should appoint specific officers to review issuer responses 
and make decisions.\148\
---------------------------------------------------------------------------

    \146\ See STA Letter at 4.
    \147\ See STA Letter at 4.
    \148\ See STA Letter at 4.
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    In its response to these comments, DTC notes that DTC Officers are 
by definition ``high ranking and charge with substantial 
responsibility.'' \149\ In addition, DTC believes the reviewing Officer 
is independent because it was not involved in the decision to impose 
the restriction in the first instance.\150\
---------------------------------------------------------------------------

    \149\ See STA Letter at 11.
    \150\ See STA Letter at 11.
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    One commenter recommends that the Proposed Rules be amended to 
require that the initiation of an action to impose Deposit Chills 
should be authorized by senior Officers of DTC designated by the Board 
of Directors, or the Chief Executive Officer, to take such 
actions.\151\ DTC believes this is unnecessary because a senior-level 
committee of officers from DTC's Operations, Risk Management, Product 
Management, Application Development and Maintenance, Legal and 
Compliance currently make, and will continue to make, the decision to 
impose service restrictions.\152\
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    \151\ See STA Letter at 4.
    \152\ See DTC Letter I at 11.
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IV. Description of Amendment No. 1

    As noted above, one commenter requested that DTC send the Deposit 
Chill Notice to the issuer's transfer agent in addition to the issuer 
itself.\153\ Amendment No. 1 incorporates this requirement into the 
Proposed Rules and provides that DTC will send a copy of the Deposit 
Chill Notice to the issuer's transfer agent via overnight courier.
---------------------------------------------------------------------------

    \153\ See STA Letter at 6.
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V. Description of Amendment No. 2

    Amendment No. 2 makes a number of clarifying revisions to the 
Proposed Rules to more accurately reflect their intended operation.
    First, DTC proposes to amend Proposed Rules 22(A)(2)(A)(i) to 
clarify that when the Deposit Chill Notice is sent prior to the 
imposition of a Deposit Chill, the date included as the date the 
Deposit Chill will be imposed sets forth the date in circumstances in 
which the issuer does not respond to the Deposit Chill Notice in the 
time or manner provided in the Proposed Rules.
    Second, DTC proposes to amendment Proposed Rule 22(A)(2)(A)(iv) to 
clarify that DTC may extend the date for an issuer to submit a Deposit 
Chill Response ``up to'' an additional twenty Business Days.
    Third, DTC proposes to revise Proposed Rule 22(A)(2)(c) to provide 
when the issuer fails to comply with a deadline in connection with an 
Additional Information Request, DTC will provide the issuer with a 
Deposit Chill Decision within twenty Business Days after the missed 
deadline.
    Fourth, DTC proposes to clarify that the Additional Information 
Request and the Additional Information Response are part of the record 
for purposes of any issuer appeal to the Commission under Proposed Rule 
22(A)(2)(d).
    Fifth, DTC proposes to amend Proposed Rule 22(A)(3)(a), which 
provides that unless the DTC expressly waives or extends in writing the 
applicable period for a submission of a Deposit Chill Response, an 
issuer waives the right to make the submission for which the deadline 
has passed. DTC's amendment would revise this section so that the 
reference to a DTC waiver relates to the applicable period for any type 
of submission provided for under Proposed Rule 22(A) and not only to a 
Deposit Chill Response.
    Sixth, DTC proposes to amend Proposed Rule 22(A)(3)(c) to correct 
the reference to ``Deposit Chill Response'' by replacing it with 
``Deposit Chill Decision.''
    Seventh, among the criteria for determining the application of the 
procedures provided under Proposed Rule 22(B), Section 1(b) provides 
that the procedures will apply where a Global Lock has been imposed as 
a result of an issuer's failure to satisfy the requirements for lifting 
a Deposit Chill in Proposed Rule 22(A)(2)(c). DTC proposes to amend 
Proposed Rule 22(B)(1)(b) to clarify that the procedures in Proposed 
Rule 22(B) will also apply where an issuer has failed to satisfy the 
requirements for not imposing a Deposit Chill.
    Eighth, DTC proposes to amend Proposed Rules 22(B)(2)(a)(i) to 
clarify that when the Global Lock Notice is sent prior to the 
imposition of a Global Lock, the date included as the date the Global 
Lock will be imposed sets forth the date in circumstances in which the 
issuer does not respond to the Global Lock Notice in the time or manner 
provided in the Proposed Rules.
    Ninth, DTC proposes to amend Proposed Rule 22(B)(2)(a)(iii) to 
clarify that DTC may extend the date for an issuer to submit a Global 
Lock Response ``up to'' an additional twenty Business Days.
    Tenth, DTC proposes to amend Proposed Rule 22(B)(2)(c) to provide 
in the case of a Global Lock imposed before issuance of the Global Lock 
Notice, DTC will provide the issuer with a Global Lock Decision within 
ten Business Days after receipt of the Global Lock Response, rather 
than within ten Business Days after imposition of the Global Lock.
    Eleventh, DTC proposes to amend Proposed Rule 22(B)(2)(c) to 
clarify that, in the event that DTC reasonably determines that a Global 
Lock Response does not satisfy the requirements of the Global Lock 
Notice, in addition to not releasing a Global Lock that is already in 
place in, DTC will also impose a Global Lock if one is not yet in 
place.
    Twelfth, DTC proposes to add a new provision providing that if DTC 
imposes a Global Lock pursuant to Proposed Rule 22(B)(5)(b) that the 
procedures contained in Proposed Rule 22(B) will apply, including that 
DTC will provide a Global Lock Decision within ten Business Days after 
it receives the Global Lock Response.

VI. Proceedings To Determine Whether to Approve or Disapprove SR-DTC-
2013-11 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act to determine whether the Proposed Rules should 
be approved or disapproved. As noted above, institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, the Commission seeks and 
encourages interested persons to comment on the Proposed Rule as set 
forth in Amendment Nos. 1 and 2, and provide the Commission with 
arguments to support the Commission's analysis as to whether to approve 
or disapprove the proposal, as amended.
    Pursuant to Section 19(b)(2)(B) of the Exchange Act,\154\ the 
Commission is providing notice of the grounds for disapproval under 
consideration. In particular, Section 17A(b)(3)(H) requires, among 
other things, that the rules of a clearing agency provide a fair 
procedure when the clearing agency prohibits or limits access to the 
clearing agency's services to a person.\155\ In addition, Section 
17A(b)(5) of the Exchange Act requires clearing agencies, when 
determining whether to deny or

[[Page 16401]]

limit access to its services, (i) to give persons in any proceeding an 
opportunity to be heard upon the specific grounds for the denial, 
prohibition, or limitation, and (ii) to keep a record of those 
proceedings.\156\
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    \154\ 19 15 U.S.C. 78s(b)(2)(B).
    \155\ 15 U.S.C. 78q-1(b)(3)(H).
    \156\ 15 U.S.C. 78q-1(b)(5).
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    As noted above, commenters raised concerns as to whether the 
Proposed Rules are consistent with the requirements to provide ``fair 
procedures,'' ``notice'' and ``an opportunity to be heard.'' The 
Commission believes that question remain as to whether the Proposed 
Rules are consistent with the requirements of the Exchange Act.
    Section 19(b)(2)(B) of the Act provides that proceedings to 
determine whether to approve or disapprove a proposed rule change must 
be concluded within 180 days of the date of publication of notice of 
the filing of the proposed rule change. The time for conclusion of the 
proceedings may be extended for up to an additional 60 days if the 
Commission finds good cause for such extension and publishes its 
reasons for so finding or if the self-regulatory organization consents 
to the extension.

VII. Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
concerns identified above, as well as any others they may have with the 
Proposed Rules, as amended. In particular, the Commission invites the 
written views of interested persons concerning whether the Proposed 
Rules, as modified by Amendment Nos. 1 and 2, are inconsistent with 
Sections 17A(b)(3)(H) and 17A(b)(5) or any other provision of the 
Exchange Act, or the rules and regulations thereunder.
    Although there do not appear to be any issues relevant to approval 
or disapproval which would be facilitated by an oral presentation of 
views, data, and arguments, the Commission will consider, pursuant to 
Rule 19b-4, any request for an opportunity to make an oral 
presentation.\157\ Interested persons are invited to submit written 
data, views, and arguments on or before April 15, 2014. Any person who 
wishes to file a rebuttal to any other person's submission must file 
that rebuttal on or before April 29, 2014. Comments may be submitted by 
any of the following methods:
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    \157\ Section 19(b)(2) of the Exchange Act, as amended by the 
Securities Acts Amendments of 1975, Public Law 94-29, 89 Stat. 97 
(1975), grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Acts Amendments of 
1975, Report of the Senate Committee on Banking, Housing and Urban 
Affairs to Accompany S. 249, S. Rep. No. 75, 94th Cong., 1st Sess. 
30 (1975).
---------------------------------------------------------------------------

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-DTC-2013-11 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-DTC-2013-11. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filings also will be available 
for inspection and copying at the principal office of DTC and on DTC's 
Web site at https://dtcc.com/en/legal/sec-rule-filings.aspx. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly.
    All submissions should refer to File Number SR-DTC-2013-11 and 
should be submitted on or before April 15, 2014. If comments are 
received, any rebuttal comments should be submitted on or before April 
29, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\158\
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    \158\ 17 CFR 200.30-3(a)(57).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-06459 Filed 3-24-14; 8:45 am]
BILLING CODE 8011-01-P
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