Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing of Proposed Rule Change Pursuant to Which It Would Impose Deposit Chills and Global Locks and Provide Fair Procedures to Issuers, 37232-37236 [2016-13614]

Download as PDF sradovich on DSK3TPTVN1PROD with NOTICES 37232 Federal Register / Vol. 81, No. 111 / Thursday, June 9, 2016 / Notices Notice is hereby given that, pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.), the Securities and Exchange Commission (‘‘Commission’’) is soliciting comments on the collection of information summarized below. The Commission plans to submit this existing collection of information to the Office of Management and Budget for extension and approval. Rule 155 (17 CFR 230.155) under the Securities Act of 1933 (15 U.S.C. 77a et seq.) provides safe harbors for a registered offering of securities following an abandoned private offering, or a private offering following an abandoned registered offering, without integrating the registered and private offerings in either case. In connection with a registered offering following an abandoned private offering, Rule 155 requires an issuer to include in any prospectus filed as a part of a registration statement disclosure regarding the abandoned the private offering. Similarly, the rule requires an issuer to provide each offeree in a private offering following an abandoned registered offering with: (1) Information concerning the withdrawal of the registration statement; (2) the fact that the private offering is unregistered; and (3) the legal implications of the offering’s unregistered status. We estimate Rule 155 takes approximately 4 hours per response to prepare and is filed by 600 respondents annually. We estimate that 50% of the 4 hours per response (2 hours per response) is prepared by the filer for a total annual reporting burden of 1,200 hours (2 hours per response × 600 responses). Written comments are invited on: (a) Whether this proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility; (b) the accuracy of the agency’s estimate of the burden imposed by the collection of information; (c) ways to enhance the quality, utility, and clarity of the information collected; and (d) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology. Consideration will be given to comments and suggestions submitted in writing within 60 days of this publication. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number. Please direct your written comments to Pamela Dyson, Director/Chief VerDate Sep<11>2014 15:50 Jun 08, 2016 Jkt 238001 Information Officer, Securities and Exchange Commission, c/o Remi PavlikSimon, 100 F Street NE., Washington, DC 20549 or send an email to: PRA_ Mailbox@sec.gov. Dated: June 3, 2016. Brent J. Fields, Secretary. [FR Doc. 2016–13618 Filed 6–8–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–77991; File No. SR–DTC– 2016–003] Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing of Proposed Rule Change Pursuant to Which It Would Impose Deposit Chills and Global Locks and Provide Fair Procedures to Issuers June 3, 2016. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on May 27, 2016, The Depository Trust Company (‘‘DTC’’) 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 DTC. DTC filed the proposed rule change pursuant to Section 19(b)(2) 3 of the Act thereunder. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Clearing Agency’s Statement of the Terms of Substance of the Proposed Rule Change The proposed rule change consists of amendments to the Rules, By-Laws and Organization Certificate of DTC (the ‘‘Rules’’) in order to add a Rule which establishes: (i) The circumstances under which DTC would impose and release a restriction on Deposits of an Eligible Security (a ‘‘Deposit Chill’’) or on bookentry services for an Eligible Security (a ‘‘Global Lock’’); and (ii) the fair procedures for notice and an opportunity for the issuer of the Eligible Security (the ‘‘Issuer’’) to challenge the Deposit Chill or Global Lock (each, a ‘‘Restriction’’), as described below.4 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 15 U.S.C. 78s(b)(2). 4 Each capitalized term not otherwise defined herein has its respective meaning as set forth in the Rules, available at https://www.dtcc.com/legal/rulesand-procedures.aspx. 2 17 PO 00000 Frm 00056 Fmt 4703 Sfmt 4703 II. Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the clearing agency 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. The clearing agency has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. (A) Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The proposal would add new Rule 33 (Deposit Chills and Global Locks) to establish: (i) The circumstances under which DTC would impose and release a Deposit Chill or a Global Lock; and (ii) the fair procedures for notice and an opportunity for the Issuer to challenge the Restriction, as described below. (i) Background A. DTC DTC is the nation’s central securities depository, registered as a clearing agency under Section 17A of the Act.5 DTC’s deposit and book-entry transfer services help facilitate the operation of the nation’s securities markets. By serving as registered holder of trillions of dollars of Securities, DTC, on a daily basis, processes enormous volumes of securities transactions facilitated by book-entry movement of interests, without the need to transfer physical certificates. DTC performs services and maintains Securities Accounts for its Participants, primarily banks and broker dealers, pursuant to its Rules and Procedures. Participants agree to be bound by the Rules and Procedures of DTC as a condition of their DTC membership.6 DTC allows a Participant to present Securities to be made eligible for DTC’s depository and book-entry services. If a Security is accepted by DTC as meeting DTC’s eligibility requirements for services 7 and is deposited with DTC for credit to the Securities Account of a 5 See Securities Exchange Act Release No. 20221 (September 23, 1983), 48 FR 45167 (October 3, 1983) (File No. 600–1). 6 See supra note 5. 7 See Rule 5, supra note 4; DTC Operational Arrangements (Necessary for Securities to Become and Remain Eligible for DTC Services), January 2012 (the ‘‘Operational Arrangements’’), Section 1, available at https://www.dtcc.com/∼/media/Files/ Downloads/legal/issue-eligibility/eligibility/ operational-arrangements.pdf. E:\FR\FM\09JNN1.SGM 09JNN1 Federal Register / Vol. 81, No. 111 / Thursday, June 9, 2016 / Notices Participant, it becomes an Eligible Security. Thereafter, Participants may deposit shares of that Eligible Security into their respective DTC accounts. To facilitate book-entry transfers and other services that DTC provides for its Participants with respect to Deposited Securities, the Deposited Securities are generally registered on the books of the Issuer (typically, in a register maintained by a transfer agent) in DTC’s nominee name, Cede & Co. Deposited Securities that are eligible for bookentry services are maintained in ‘‘fungible bulk,’’ i.e., each Participant whose Securities of an issue have been credited to its Securities Account has a pro rata (proportionate) interest in DTC’s entire inventory of that issue, but none of the Securities on deposit are identifiable to or ‘‘owned’’ by any particular Participant.8 The Commission has recognized that DTC plays a ‘‘critical function’’ in the National Clearance and Settlement system.9 More recently, the federal Financial Stability Oversight Council, which was established pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act,10 designated DTC as a Systemically Important Financial Market Utility (as defined therein).11 B. Deposit Chills and Global Locks: Prior Procedures sradovich on DSK3TPTVN1PROD with NOTICES Previously, upon detecting suspiciously large deposits of a thinly traded Eligible Security, DTC imposed or proposed to impose a Deposit Chill as a measure to maintain the status quo while, pursuant to its Operational Arrangements,12 DTC required the Issuer to confirm by legal opinion of independent counsel that the Eligible Security fulfilled the requirements for eligibility. The Deposit Chill would be maintained until the Issuer provided a satisfactory legal opinion. The Deposit Chill could remain in place for years, 8 See Securities Exchange Act Release No. 19678 (April 15, 1983), 48 FR 17603, 17605, n.5 (April 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’’). 9 See Securities Exchange Act Release No. 47978 (June 4, 2003), 68 FR 35037, 35041 (June 11, 2003) (File No. SR–DTC–2003–02). 10 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111–203, 124 Stat. 1376 (2010). 11 See Financial Stability Oversight Council, 2012 Annual Report, Appendix A, available at https:// www.treasury.gov/initiatives/fsoc/Documents/ 2012%20Appendix%20A%20Designation%20of% 20Systemically%20Important %20Market%20Utilities.pdf. 12 See Operational Arrangements, Section I.A, supra note 7. VerDate Sep<11>2014 15:50 Jun 08, 2016 Jkt 238001 due to an Issuer’s non-responsiveness, refusal, or inability to submit the required legal opinion. With respect to Global Locks, DTC previously imposed a Global Lock on an Eligible Security when a governmental or regulatory authority commenced a proceeding or action alleging violations of Section 5 of the Securities Act of 1933, as amended, with respect to such Eligible Security. A Global Lock could be released when the underlying enforcement action was withdrawn, dismissed on the merits with prejudice, or otherwise resolved in a final, nonappealable judgment in favor of the defendants allegedly responsible for the violations of federal securities laws. However, many enforcement actions are only resolved after several years 13 and commonly without any definitive determination of wrongdoing.14 The above describes, in part, the proposed procedures filed by DTC on December 5, 2013,15 in response to the Commission’s opinion and order in In re International Power Group, Ltd. (‘‘IPWG’’) directing DTC to ‘‘adopt procedures that accord with the fairness requirements of Section 17A(b)(3)(H).’’ 16 DTC withdrew the proposed rule change on August 18, 2014.17 As a result of DTC’s experiences following the IPWG decision and in connection with the previous proposed rule change, DTC has determined that its proposed procedures for imposing Deposit Chills and Global Locks are more appropriately directed to current trading halts or suspensions imposed by the Commission, the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’), or a court of competent jurisdiction, and therefore are more effective in targeting suspected securities fraud that is ongoing at the time the Restriction is imposed. In particular, with respect to Deposit Chills imposed pursuant to DTC’s previous procedures, DTC believes that wrongdoers have seemingly taken into account DTC’s Restriction process, and have been 13 See, e.g., SEC v. Kahlon, 12–CV–517 (E.D. Tex., filed August 14, 2012); SEC v. Bronson, 12–cv– 06421–KMK (S.D.N.Y., filed August 22, 2012). As of the date of this filing, neither case has been resolved. 14 See, e.g., SEC v. Reiss, 13–cv–01537, dkt no. 10 (S.D.N.Y. 2014) (issuing a final judgment against the defendant in an enforcement action, without the defendant admitting or denying the allegations). 15 See Securities Exchange Act Release No. 71132 (December 18, 2013); 78 FR 77755 (December 24, 2013) (File No. SR–DTC–2013–11). 16 See Securities Exchange Act Release No. 66611 (March 15, 2012), 2012 SEC LEXIS 844 at *32 (March 15, 2012) (Admin. Proc. File No. 3–13687). 17 See Securities Exchange Act Release No. 72860 (August 18, 2014), 79 FR 49825 (August 22, 2014) (File No. SR–DTC–2013–11). PO 00000 Frm 00057 Fmt 4703 Sfmt 4703 37233 avoiding it by shortening the timeframe in which they complete their scheme, dump their shares into the market, and move on to another issue. Additionally, Global Locks were typically being imposed on the basis of a Commission enforcement action alleging securities law violations that had occurred in the past, and so could not affect the violative behavior (unless the alleged securities law violations were ongoing). In fact, it is DTC’s understanding that, by the time of an enforcement action, the wrongdoers had long since transferred the subject securities. In addition, although a Global Lock bars book-entry settlements within DTC, it does not affect the trading of the issue, which occurs outside of DTC. (ii) Proposal A. Proposed Basis for the Imposition of Deposit Chills and Global Locks With this proposal, DTC would establish the basis for the imposition of Deposit Chills and Global Locks, premised on direct current judicial or regulatory intervention or the threat of imminent adverse consequences to DTC or its Participants. DTC believes that the proposed rule change would provide a basis for imposing and releasing Restrictions that is consistent with its obligations under applicable law. Under subsections (a) and (b) of Section 1 of the proposed rule, if FINRA or the Commission halts or suspends trading of an Eligible Security, DTC would impose a Global Lock. Similarly, under subsection (c) of Section 1 of the proposed rule, DTC would impose a Restriction if ordered to do so by a court of competent jurisdiction. Consistent with its mandate ‘‘to promote the prompt and accurate clearance and settlement of securities transactions,’’ 18 DTC’s facilities should not be available to settle transactions otherwise prohibited by the Commission, FINRA, or a court of competent jurisdiction. The imposition of a Global Lock on an Eligible Security for which trading is halted or suspended would prevent settlement of trades that continue despite the halt or suspension, and prevent a bad actor from liquidating a position through DTC in order to obtain the proceeds of fraudulent activities. Notwithstanding subsections (a) and (b) of Section 1 of the proposed Rule, DTC recognizes that FINRA and the Commission issue trading halts and suspensions for numerous reasons, and so there may be certain limited circumstances where a Global Lock 18 15 E:\FR\FM\09JNN1.SGM U.S.C. 78q–1(b)(3)(F). 09JNN1 37234 Federal Register / Vol. 81, No. 111 / Thursday, June 9, 2016 / Notices sradovich on DSK3TPTVN1PROD with NOTICES would not further the regulatory purpose of such trading halt or suspension. Therefore, if DTC reasonably determines that such is the case, DTC may decline to impose a Global Lock. Some examples of when DTC may decline to impose a Global Lock include, but are not limited to, if FINRA issues a trading halt in all OTC equity securities due to a technical glitch; or if FINRA issues a trading halt clearly based on financial uncertainty in a foreign jurisdiction that doesn’t affect DTC’s ability to settle transactions. Finally, under subsection (d) of Section 1 of the proposed rule, DTC would impose a Restriction when it becomes aware of a need for immediate action to avert an imminent harm, injury, or other such material adverse consequence to DTC or its Participants that could arise from further Deposits of, or continued book-entry services with respect to, an Eligible Security. While it is impossible to anticipate all possible scenarios that may give rise to the need for action by DTC under this subsection (d) to avoid imminent harm, DTC does not anticipate that it would impose Restrictions pursuant to this formulation frequently. Some examples where this provision may be invoked include, but are not limited to, if DTC becomes aware that marketplace actors were about to deposit Securities at DTC in connection with an ongoing corporate hijacking, market manipulation, or in violation of other applicable laws; if an Issuer or its agent provides DTC with plausible information that Security certificates were stolen and were about to be deposited; or if an Issuer notifies DTC that shares of a Security had just been issued erroneously upon a conversion of previously satisfied notes. The concept of taking immediate action to avoid imminent harm to DTC or its Participants was recognized in the Commission’s opinion in IPWG. The Commission ruled that, when faced with justifiable circumstances, DTC may design fair procedures ‘‘in accordance with its own internal needs and circumstances,’’ 19 recognizing that: If DTC believes that circumstances exist that justify imposing a 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, it may do so. However, in such circumstances, these processes should balance the identifiable need for emergency action with the issuer’s right to fair procedures under the Exchange Act. Under such procedures, DTC would be authorized to act to avert an imminent harm, but it could not maintain such a suspension indefinitely 19 IPWG, 2012 SEC LEXIS at *30, n.36. VerDate Sep<11>2014 15:50 Jun 08, 2016 Jkt 238001 without providing expedited fair process to the affected issuer.20 B. Proposed Basis for the Release of Deposit Chills and Global Locks As part of DTC’s process for imposing Restrictions premised on direct court or regulatory agency intervention or the prospect of imminent adverse consequences to DTC or its Participants, the proposed rule change provides corresponding criteria for releasing such Restrictions. As an initial matter, pursuant to the proposed rule change, DTC would release a Restriction when DTC reasonably determines that its imposition of the Restriction was based on a clerical mistake. In the case of a Global Lock imposed pursuant to subsections (a) or (b) of Section 1 of the proposed rule (FINRA trading halt or Commission trading suspension), under the proposed rule change, DTC would release the Global Lock when the halt or suspension of trading of the Eligible Security has been lifted. In the case of a Restriction imposed pursuant to subsection (c) of Section 1 of the proposed rule (order from a court of competent jurisdiction), under the proposed rule change, DTC would release the Restriction when a court of competent jurisdiction orders DTC to release the Restriction. Since trading would no longer be prohibited by FINRA, the Commission, or court order, respectively, there should not be any settlement restrictions, other than those otherwise provided in the Rules. Finally, in the case of a Restriction imposed pursuant to subsection (d) of Section 1 of the proposed rule (imminent adverse consequences to DTC or its Participants), pursuant to the proposed rule change, DTC would release the Restriction when it reasonably determines that the release of the Restriction would not pose a threat of imminent adverse consequences to DTC or its Participants, obviating the original basis for the Restriction. It is impossible to anticipate all possible scenarios that may give rise to a release of a Restriction under this basis. However, DTC anticipates that it would release such Restriction in a number of circumstances, including without limitation: • When DTC determines that the perceived harm has passed or is significantly remote; 20 Id. at *29. See also In re Atlantis Internet Group (‘‘Atlantis’’), Securities Exchange Act Release. No. 75168 at 7–8, 2015 SEC LEXIS 2394 at *18 (June 12, 2015) (Admin. Proc. File No. 3–15432) (‘‘DTC’s imposition of the Global Lock without advance notice was an appropriate exercise of its authority to act to prevent imminent harm . . .’’). PO 00000 Frm 00058 Fmt 4703 Sfmt 4703 • when the basis for the Restriction no longer exists. For example, where DTC imposed a Deposit Chill on the basis of plausible information that certificates were stolen and about to be deposited, and DTC subsequently receives plausible information that the certificates have been recovered and will not be deposited, or where DTC imposed a Deposit Chill based on erroneously issued shares, and subsequently receives copies of a ‘‘Stop transfer’’ 21 directive and cancellation of such shares before they have been deposited; or • when an Eligible Security had been previously Globally Locked based on a Commission enforcement action but there is no indication that illegally distributed Securities are about to be deposited. C. Proposed Fair Procedures DTC has developed the procedures in the proposed rule change to give the Issuer a timely notice of the Restriction, provide the Issuer an opportunity to submit a written challenge to the Restriction, provide a review and written determination by an independent officer, and maintain a complete record of the proceeding, consistent with Section 17A(b)(3)(H) of the Act 22 and the Commission’s opinion and order in IPWG. Pursuant to the proposed rule change, DTC would send written notice (‘‘Restriction Notice’’) to the Issuer’s last known business address and to the last known business address of the Issuer’s transfer agent, if any, on record with DTC. The Restriction Notice would be sent within three Business Days of imposition of a Restriction and would set forth: (i) The basis for the Restriction; (ii) the date the Restriction was imposed; (iii) that the Issuer may submit a written response to DTC detailing the basis for release of the Restriction under proposed Rule 33 (‘‘the Restriction Response’’); and (iv) that the Restriction Response must be received by DTC within twenty Business Days of delivery of the Restriction Notice. Once the Restriction Response is received by DTC, the proposed rule change provides that it would be reviewed by a DTC officer who did not have responsibility for the imposition of the Restriction. DTC may request additional information from the Issuer. After the officer’s review is completed, DTC would provide a written decision (a ‘‘Restriction Decision’’) to the Issuer. 21 A ‘‘stop transfer’’ is an order made to prevent the transfer of ownership of a security. 22 15 U.S.C. 78q–1(b)(3)(H). E:\FR\FM\09JNN1.SGM 09JNN1 Federal Register / Vol. 81, No. 111 / Thursday, June 9, 2016 / Notices sradovich on DSK3TPTVN1PROD with NOTICES Within ten Business Days of delivery of the Restriction Decision, the Issuer may submit a supplement (a ‘‘Supplement’’) for the sole purpose of establishing that DTC made a clerical mistake or mistake arising from an oversight or omission in reviewing the Restriction Response. If the Issuer submits a Supplement, the officer would provide a supplement decision (a ‘‘Supplement Decision’’) within ten Business Days after the Supplement was delivered. The Restriction Notice, the Restriction Response, the Restriction Decision, the Supplement, the Supplement Decision, and any other documents submitted in connection with these procedures would constitute the record for purposes of any appeal to the Commission. The proposed rule change would not affect DTC’s ability (A) to lift or modify a Restriction; (B) to operationally restrict book-entry services, Deposits or other services in the ordinary course of business, as such restrictions do not constitute Deposit Chills or Global Locks for purposes of proposed Rule 33; (C) to communicate with the Issuer or its transfer agent or representative, if any, provided that substantive communications are memorialized in writing to be included in the record for purposes of any appeal to the Commission; or (D) to send out a Restriction Notice prior to the imposition of a Restriction. DTC believes that these procedures comport with Section 17A(b)(3)(H) of the Act, which requires that a registered clearing agency that denies or limits access to the agency’s services to a ‘‘person,’’ it must ‘‘provide a fair procedure.’’ 23 Such procedures require the clearing agency to give the person notice and an opportunity to address the specific grounds for denial or prohibition or limitation and to keep a record.24 In its decision in IPWG, the Commission ruled, inter alia, that issuers are ‘‘persons’’ for the purposes of Section 17A(b)(3).25 Section 17A of the Act does not specify the nature of the fair procedures DTC must provide to ‘‘persons,’’ including issuers. In IPWG, the Commission observed that: Exchange Act Section 17A(b)(5)(B) states that, when a registered clearing agency determines that ‘‘a person shall be . . . prohibited or limited with respect to access to services offered by the clearing agency, the clearing agency shall notify such person of, and give him an opportunity to be heard upon, the specific grounds for . . . prohibition or limitation under consideration and keep a record.’’ 26 As stated in IPWG, ‘‘DTC may design such [Section 17A procedures] in accordance with its own internal needs and circumstances.’’ 27 The Commission further ruled in IPWG that DTC ‘‘should adopt procedures that accord with the fairness requirements of Section 17A(b)(3)(H), which may be applied uniformly’’ in the cases where DTC denies or limits services with respect to an Issuer’s Securities. In the Commission’s more recent opinion in Atlantis, the Commission upheld the notice, opportunity to be heard, and recordkeeping that DTC provided to a Globally Locked issuer. Significantly, the Commission held that Section 17A of the Act does not require DTC to hold a formal hearing in order to satisfy its obligations under Section 17A to provide Issuers with an opportunity to be heard.28 DTC believes that the procedures in proposed Rule 33 for giving notice of the Restriction to the Issuer with an opportunity to be heard are consistent with the fair procedures upheld by the Commission in Atlantis. In addition, consistent with the Commission’s broad directive in IPWG, DTC believes that the proposed rule would establish uniform standards for the imposition of Restrictions, as well as the fair procedures for Issuers whose Securities are subject to a Restriction. Implementation Timeframe DTC will announce the effective date via Important Notice upon the Commission’s approval of the proposed rule change. 2. Statutory Basis DTC believes that the proposed rule change is consistent with the requirements of the Act, and the rules and regulations thereunder applicable to DTC, in particular Section 17A(b)(3)(F) of the Act 29 and Section 17A(b)(3)(H) of the Act.30 Section 17A(b)(3)(F) of the Act 31 requires, inter alia, that the rules of the clearing agency be designed to promote the prompt and accurate clearance and settlement of securities transactions, and to assure the safeguarding of securities and funds which are in the custody or control of the clearing agency or for which it is responsible. By establishing a framework for DTC to 26 Id. 27 Id. at *30 n.36. at *19. 29 15 U.S.C. 78q–1(b)(3)(F). 30 15 U.S.C. 78q–1(b)(3)(H). 31 15 U.S.C. 78q–1(b)(3)(F). 28 Id. 23 See id. 15 U.S.C. 78q–1(b)(5)(B). 25 IPWG, 2012 SEC LEXIS at *24. 24 See VerDate Sep<11>2014 15:50 Jun 08, 2016 Jkt 238001 PO 00000 Frm 00059 Fmt 4703 Sfmt 4703 37235 impose and release Restrictions, the proposed rule change would provide a mechanism for DTC to act quickly and efficiently to screen out, prior to deposit, or restrict, after deposit, Securities for which trading has been prohibited by the Commission, FINRA, or a court of competent jurisdiction, or which pose a threat of imminent adverse consequences to DTC or its Participants, to assure the safeguarding of Securities deposited to and held by DTC, consistent with the requirements of the Act, in particular Section 17A(b)(3)(F) of the Act, cited above. Section 17A(b)(3)(H) of the Act, requires, inter alia, that the rules of a clearing agency are in accordance with the provisions of Section 17A(b)(5)(B) of the Act,32 and in general provide a fair procedure with respect to the prohibition or limitation by the clearing agency of any person with respect to access to services offered by the clearing agency. By establishing a procedure that would provide for: (A) Criteria for notice to an Issuer that a Deposit Chill or Global Lock has been imposed; (B) an explanation of the specific grounds upon which any Restriction has been imposed; (C) the actions that the Issuer may take to object to the Restriction; (D) the process DTC would undertake to review written submissions of the Issuer and to render a final decision concerning the Restriction; (E) the grounds upon which DTC may release the Restriction; and (F) the maintenance of a complete record for submission to the Commission in the event an Issuer appeals, the proposed rule change would provide Issuers with fair procedures with respect to Deposit Chills and Global Locks, consistent with the requirements of the Act, in particular Section 17A(b)(3)(H) of the Act, cited above.33 (B) Clearing Agency’s Statement on Burden on Competition DTC does not believe that the proposed rule change would have any impact on, or impose any burden on competition that is not necessary or 32 Section 17A(b)(5)(B) of the Act, 15 U.S.C. 78q– 1(b)(5)(B) provides: ‘‘In any proceeding by a registered clearing agency to determine whether a person shall be denied participation or prohibited or limited with respect to access to services offered by the clearing agency, the clearing agency shall notify such person of, and give him an opportunity to be heard upon, the specific grounds for denial or prohibition or limitation under consideration and keep a record. A determination by the clearing agency to deny participation or prohibit or limit a person with respect to access to services offered by the clearing agency shall be supported by a statement setting forth the specific grounds on which the denial or prohibition or limitation is based.’’ 33 15 U.S.C. 78q–1(b)(3)(H). E:\FR\FM\09JNN1.SGM 09JNN1 37236 Federal Register / Vol. 81, No. 111 / Thursday, June 9, 2016 / Notices appropriate in furtherance of the purposes of the Act, because the proposed procedures as described above would apply to all Eligible Securities that may be subject to a Deposit Chill or Global Lock. (C) Clearing Agency’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments relating to the proposed rule change have not been solicited or received with respect to this filing. To the extent DTC receives written comments on the proposed rule change DTC will forward such comments to the Commission. III. Date of Effectiveness of the Proposed Rule Change, and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove such proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments 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: sradovich on DSK3TPTVN1PROD with NOTICES 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–2016–003 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549. All submissions should refer to File Number SR–DTC–2016–003. 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 VerDate Sep<11>2014 15:50 Jun 08, 2016 Jkt 238001 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 DTC and on DTCC’s Web site (https://dtcc.com/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– 2016–003 and should besubmitted on or before June 30, 2016. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.34 Brent J. Fields, Secretary. [FR Doc. 2016–13614 Filed 6–8–16; 8:45 am] BILLING CODE 8011–01–P DEPARTMENT OF STATE [Public Notice: 9600] International Security Advisory Board (ISAB) Meeting Notice Closed Meeting In accordance with section 10(a)(2) of the Federal Advisory Committee Act, 5 U.S.C. App 10(a)(2), the Department of State announces a meeting of the International Security Advisory Board (ISAB) to take place on July 12, 2016, at the Department of State, Washington, DC. Pursuant to section 10(d) of the Federal Advisory Committee Act, 5 U.S.C. App 10(d), and 5 U.S.C. 552b(c)(1), it has been determined that this Board meeting will be closed to the public because the Board will be reviewing and discussing matters properly classified in accordance with Executive Order 13526. The purpose of the ISAB is to provide the Department with a continuing source of independent advice on all aspects of 34 17 PO 00000 CFR 200.30–3(a)(12). Frm 00060 Fmt 4703 Sfmt 4703 arms control, disarmament, nonproliferation, political-military affairs, international security, and related aspects of public diplomacy. The agenda for this meeting will include classified discussions related to the Board’s studies on current U.S. policy and issues regarding arms control, international security, nuclear proliferation, and diplomacy. For more information, contact Christopher Herrick, Acting Executive Director of the International Security Advisory Board, U. S. Department of State, Washington, DC 20520, telephone: (202) 647–9683. Dated: May 20, 2016. Christopher Herrick, Acting Executive Director, International Security Advisory Board, U.S. Department of State. [FR Doc. 2016–13677 Filed 6–8–16; 8:45 am] BILLING CODE 4710–24–P SURFACE TRANSPORTATION BOARD [Docket No. AB 55 (Sub-No. 760X)] CSX Transportation, Inc.— Discontinuance of Service Exemption—in Boone County, W.Va. CSX Transportation, Inc. (CSXT) has filed a verified notice of exemption under 49 CFR pt. 1152 subpart F— Exempt Abandonments and Discontinuances of Service to discontinue service over an approximately 2.9-mile rail line on CSXT’s Southern Region, Huntington Division, Pond Fork Subdivision, the Robinson Creek Industrial Track, from the connection with CSXT’s mainline at milepost CLK 0.0 to the end of the line at milepost CLK 2.9+ in Boone County, W.Va. (the Line). The Line traverses United States Postal Service Zip Code 26325 and includes the Holbrook station at milepost CLK 2.0 (FSAC 82034/OPSL 65220).1 CSXT has certified that: (1) No local traffic has moved over the Line for at least two years; (2) because the Line is not a through route, no overhead traffic has operated, and, therefore, none needs to be rerouted over other lines; (3) no formal complaint filed by a user of rail service on the Line (or by a state or local government entity acting on behalf of such user) regarding cessation of service over the Line is pending either with the Surface Transportation Board (Board) or with any U.S. District Court or has been decided in favor of complainant within the two-year period; and (4) the requirements at 49 CFR 1105.12 1 CSXT E:\FR\FM\09JNN1.SGM states that this station can be closed. 09JNN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 81, Number 111 (Thursday, June 9, 2016)]
[Notices]
[Pages 37232-37236]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-13614]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77991; File No. SR-DTC-2016-003]

Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing of Proposed Rule Change Pursuant to Which It Would
Impose Deposit Chills and Global Locks and Provide Fair Procedures to
Issuers

June 3, 2016.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on May 27, 2016, The Depository Trust Company (``DTC'') 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 DTC. DTC filed the proposed rule change pursuant to Section
19(b)(2) \3\ of the Act thereunder. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------

\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change

The proposed rule change consists of amendments to the Rules, By-
Laws and Organization Certificate of DTC (the ``Rules'') in order to
add a Rule which establishes: (i) The circumstances under which DTC
would impose and release a restriction on Deposits of an Eligible
Security (a ``Deposit Chill'') or on book-entry services for an
Eligible Security (a ``Global Lock''); and (ii) the fair procedures for
notice and an opportunity for the issuer of the Eligible Security (the
``Issuer'') to challenge the Deposit Chill or Global Lock (each, a
``Restriction''), as described below.\4\
---------------------------------------------------------------------------

\4\ Each capitalized term not otherwise defined herein has its
respective meaning as set forth in the Rules, available at https://www.dtcc.com/legal/rules-and-procedures.aspx.
---------------------------------------------------------------------------

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change

In its filing with the Commission, the clearing agency 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. The clearing agency has prepared summaries,
set forth in sections A, B, and C below, of the most significant
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change

1. Purpose
The proposal would add new Rule 33 (Deposit Chills and Global
Locks) to establish: (i) The circumstances under which DTC would impose
and release a Deposit Chill or a Global Lock; and (ii) the fair
procedures for notice and an opportunity for the Issuer to challenge
the Restriction, as described below.
(i) Background
A. DTC
DTC is the nation's central securities depository, registered as a
clearing agency under Section 17A of the Act.\5\ DTC's deposit and
book-entry transfer services help facilitate the operation of the
nation's securities markets. By serving as registered holder of
trillions of dollars of Securities, DTC, on a daily basis, processes
enormous volumes of securities transactions facilitated by book-entry
movement of interests, without the need to transfer physical
certificates.
---------------------------------------------------------------------------

\5\ See Securities Exchange Act Release No. 20221 (September 23,
1983), 48 FR 45167 (October 3, 1983) (File No. 600-1).
---------------------------------------------------------------------------

DTC performs services and maintains Securities Accounts for its
Participants, primarily banks and broker dealers, pursuant to its Rules
and Procedures. Participants agree to be bound by the Rules and
Procedures of DTC as a condition of their DTC membership.\6\ DTC allows
a Participant to present Securities to be made eligible for DTC's
depository and book-entry services. If a Security is accepted by DTC as
meeting DTC's eligibility requirements for services \7\ and is
deposited with DTC for credit to the Securities Account of a

[[Page 37233]]

Participant, it becomes an Eligible Security. Thereafter, Participants
may deposit shares of that Eligible Security into their respective DTC
accounts. To facilitate book-entry transfers and other services that
DTC provides for its Participants with respect to Deposited Securities,
the Deposited Securities are generally registered on the books of the
Issuer (typically, in a register maintained by a transfer agent) in
DTC's nominee name, Cede & Co. Deposited Securities that are eligible
for book-entry services are maintained in ``fungible bulk,'' i.e., each
Participant whose Securities of an issue have been credited to its
Securities Account has a pro rata (proportionate) interest in DTC's
entire inventory of that issue, but none of the Securities on deposit
are identifiable to or ``owned'' by any particular Participant.\8\
---------------------------------------------------------------------------

\6\ See supra note 5.
\7\ See Rule 5, supra note 4; DTC Operational Arrangements
(Necessary for Securities to Become and Remain Eligible for DTC
Services), January 2012 (the ``Operational Arrangements''), Section
1, available at https://www.dtcc.com/~/media/Files/Downloads/legal/
issue-eligibility/eligibility/operational-arrangements.pdf.
\8\ See Securities Exchange Act Release No. 19678 (April 15,
1983), 48 FR 17603, 17605, n.5 (April 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'').
---------------------------------------------------------------------------

The Commission has recognized that DTC plays a ``critical
function'' in the National Clearance and Settlement system.\9\ More
recently, the federal Financial Stability Oversight Council, which was
established pursuant to the Dodd-Frank Wall Street Reform and Consumer
Protection Act,\10\ designated DTC as a Systemically Important
Financial Market Utility (as defined therein).\11\
---------------------------------------------------------------------------

\9\ See Securities Exchange Act Release No. 47978 (June 4,
2003), 68 FR 35037, 35041 (June 11, 2003) (File No. SR-DTC-2003-02).
\10\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Pub. L. 111-203, 124 Stat. 1376 (2010).
\11\ See Financial Stability Oversight Council, 2012 Annual
Report, Appendix A, available at https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Appendix%20A%20Designation%20of%20Systemically%20Important%20Market%20Utilities.pdf.
---------------------------------------------------------------------------

B. Deposit Chills and Global Locks: Prior Procedures
Previously, upon detecting suspiciously large deposits of a thinly
traded Eligible Security, DTC imposed or proposed to impose a Deposit
Chill as a measure to maintain the status quo while, pursuant to its
Operational Arrangements,\12\ DTC required the Issuer to confirm by
legal opinion of independent counsel that the Eligible Security
fulfilled the requirements for eligibility. The Deposit Chill would be
maintained until the Issuer provided a satisfactory legal opinion. The
Deposit Chill could remain in place for years, due to an Issuer's non-
responsiveness, refusal, or inability to submit the required legal
opinion.
---------------------------------------------------------------------------

\12\ See Operational Arrangements, Section I.A, supra note 7.
---------------------------------------------------------------------------

With respect to Global Locks, DTC previously imposed a Global Lock
on an Eligible Security when a governmental or regulatory authority
commenced a proceeding or action alleging violations of Section 5 of
the Securities Act of 1933, as amended, with respect to such Eligible
Security. A Global Lock could be released when the underlying
enforcement action was withdrawn, dismissed on the merits with
prejudice, or otherwise resolved in a final, non-appealable judgment in
favor of the defendants allegedly responsible for the violations of
federal securities laws. However, many enforcement actions are only
resolved after several years \13\ and commonly without any definitive
determination of wrongdoing.\14\
---------------------------------------------------------------------------

\13\ See, e.g., SEC v. Kahlon, 12-CV-517 (E.D. Tex., filed
August 14, 2012); SEC v. Bronson, 12-cv-06421-KMK (S.D.N.Y., filed
August 22, 2012). As of the date of this filing, neither case has
been resolved.
\14\ See, e.g., SEC v. Reiss, 13-cv-01537, dkt no. 10 (S.D.N.Y.
2014) (issuing a final judgment against the defendant in an
enforcement action, without the defendant admitting or denying the
allegations).
---------------------------------------------------------------------------

The above describes, in part, the proposed procedures filed by DTC
on December 5, 2013,\15\ in response to the Commission's opinion and
order in In re International Power Group, Ltd. (``IPWG'') directing DTC
to ``adopt procedures that accord with the fairness requirements of
Section 17A(b)(3)(H).'' \16\ DTC withdrew the proposed rule change on
August 18, 2014.\17\
---------------------------------------------------------------------------

\15\ See Securities Exchange Act Release No. 71132 (December 18,
2013); 78 FR 77755 (December 24, 2013) (File No. SR-DTC-2013-11).
\16\ See Securities Exchange Act Release No. 66611 (March 15,
2012), 2012 SEC LEXIS 844 at *32 (March 15, 2012) (Admin. Proc. File
No. 3-13687).
\17\ See Securities Exchange Act Release No. 72860 (August 18,
2014), 79 FR 49825 (August 22, 2014) (File No. SR-DTC-2013-11).
---------------------------------------------------------------------------

As a result of DTC's experiences following the IPWG decision and in
connection with the previous proposed rule change, DTC has determined
that its proposed procedures for imposing Deposit Chills and Global
Locks are more appropriately directed to current trading halts or
suspensions imposed by the Commission, the Financial Industry
Regulatory Authority, Inc. (``FINRA''), or a court of competent
jurisdiction, and therefore are more effective in targeting suspected
securities fraud that is ongoing at the time the Restriction is
imposed. In particular, with respect to Deposit Chills imposed pursuant
to DTC's previous procedures, DTC believes that wrongdoers have
seemingly taken into account DTC's Restriction process, and have been
avoiding it by shortening the timeframe in which they complete their
scheme, dump their shares into the market, and move on to another
issue.
Additionally, Global Locks were typically being imposed on the
basis of a Commission enforcement action alleging securities law
violations that had occurred in the past, and so could not affect the
violative behavior (unless the alleged securities law violations were
ongoing). In fact, it is DTC's understanding that, by the time of an
enforcement action, the wrongdoers had long since transferred the
subject securities. In addition, although a Global Lock bars book-entry
settlements within DTC, it does not affect the trading of the issue,
which occurs outside of DTC.
(ii) Proposal
A. Proposed Basis for the Imposition of Deposit Chills and Global Locks
With this proposal, DTC would establish the basis for the
imposition of Deposit Chills and Global Locks, premised on direct
current judicial or regulatory intervention or the threat of imminent
adverse consequences to DTC or its Participants. DTC believes that the
proposed rule change would provide a basis for imposing and releasing
Restrictions that is consistent with its obligations under applicable
law.
Under subsections (a) and (b) of Section 1 of the proposed rule, if
FINRA or the Commission halts or suspends trading of an Eligible
Security, DTC would impose a Global Lock. Similarly, under subsection
(c) of Section 1 of the proposed rule, DTC would impose a Restriction
if ordered to do so by a court of competent jurisdiction. Consistent
with its mandate ``to promote the prompt and accurate clearance and
settlement of securities transactions,'' \18\ DTC's facilities should
not be available to settle transactions otherwise prohibited by the
Commission, FINRA, or a court of competent jurisdiction. The imposition
of a Global Lock on an Eligible Security for which trading is halted or
suspended would prevent settlement of trades that continue despite the
halt or suspension, and prevent a bad actor from liquidating a position
through DTC in order to obtain the proceeds of fraudulent activities.
---------------------------------------------------------------------------

\18\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

Notwithstanding subsections (a) and (b) of Section 1 of the
proposed Rule, DTC recognizes that FINRA and the Commission issue
trading halts and suspensions for numerous reasons, and so there may be
certain limited circumstances where a Global Lock

[[Page 37234]]

would not further the regulatory purpose of such trading halt or
suspension. Therefore, if DTC reasonably determines that such is the
case, DTC may decline to impose a Global Lock. Some examples of when
DTC may decline to impose a Global Lock include, but are not limited
to, if FINRA issues a trading halt in all OTC equity securities due to
a technical glitch; or if FINRA issues a trading halt clearly based on
financial uncertainty in a foreign jurisdiction that doesn't affect
DTC's ability to settle transactions.
Finally, under subsection (d) of Section 1 of the proposed rule,
DTC would impose a Restriction when it becomes aware of a need for
immediate action to avert an imminent harm, injury, or other such
material adverse consequence to DTC or its Participants that could
arise from further Deposits of, or continued book-entry services with
respect to, an Eligible Security. While it is impossible to anticipate
all possible scenarios that may give rise to the need for action by DTC
under this subsection (d) to avoid imminent harm, DTC does not
anticipate that it would impose Restrictions pursuant to this
formulation frequently. Some examples where this provision may be
invoked include, but are not limited to, if DTC becomes aware that
marketplace actors were about to deposit Securities at DTC in
connection with an ongoing corporate hijacking, market manipulation, or
in violation of other applicable laws; if an Issuer or its agent
provides DTC with plausible information that Security certificates were
stolen and were about to be deposited; or if an Issuer notifies DTC
that shares of a Security had just been issued erroneously upon a
conversion of previously satisfied notes.
The concept of taking immediate action to avoid imminent harm to
DTC or its Participants was recognized in the Commission's opinion in
IPWG. The Commission ruled that, when faced with justifiable
circumstances, DTC may design fair procedures ``in accordance with its
own internal needs and circumstances,'' \19\ recognizing that:
---------------------------------------------------------------------------

\19\ IPWG, 2012 SEC LEXIS at *30, n.36.

If DTC believes that circumstances exist that justify imposing a
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, it may do so. However, in
such circumstances, these processes should balance the identifiable
need for emergency action with the issuer's right to fair procedures
under the Exchange Act. Under such procedures, DTC would be
authorized to act to avert an imminent harm, but it could not
maintain such a suspension indefinitely without providing expedited
fair process to the affected issuer.\20\
---------------------------------------------------------------------------

\20\ Id. at *29. See also In re Atlantis Internet Group
(``Atlantis''), Securities Exchange Act Release. No. 75168 at 7-8,
2015 SEC LEXIS 2394 at *18 (June 12, 2015) (Admin. Proc. File No. 3-
15432) (``DTC's imposition of the Global Lock without advance notice
was an appropriate exercise of its authority to act to prevent
imminent harm . . .'').
---------------------------------------------------------------------------

B. Proposed Basis for the Release of Deposit Chills and Global Locks
As part of DTC's process for imposing Restrictions premised on
direct court or regulatory agency intervention or the prospect of
imminent adverse consequences to DTC or its Participants, the proposed
rule change provides corresponding criteria for releasing such
Restrictions.
As an initial matter, pursuant to the proposed rule change, DTC
would release a Restriction when DTC reasonably determines that its
imposition of the Restriction was based on a clerical mistake.
In the case of a Global Lock imposed pursuant to subsections (a) or
(b) of Section 1 of the proposed rule (FINRA trading halt or Commission
trading suspension), under the proposed rule change, DTC would release
the Global Lock when the halt or suspension of trading of the Eligible
Security has been lifted. In the case of a Restriction imposed pursuant
to subsection (c) of Section 1 of the proposed rule (order from a court
of competent jurisdiction), under the proposed rule change, DTC would
release the Restriction when a court of competent jurisdiction orders
DTC to release the Restriction. Since trading would no longer be
prohibited by FINRA, the Commission, or court order, respectively,
there should not be any settlement restrictions, other than those
otherwise provided in the Rules.
Finally, in the case of a Restriction imposed pursuant to
subsection (d) of Section 1 of the proposed rule (imminent adverse
consequences to DTC or its Participants), pursuant to the proposed rule
change, DTC would release the Restriction when it reasonably determines
that the release of the Restriction would not pose a threat of imminent
adverse consequences to DTC or its Participants, obviating the original
basis for the Restriction.
It is impossible to anticipate all possible scenarios that may give
rise to a release of a Restriction under this basis. However, DTC
anticipates that it would release such Restriction in a number of
circumstances, including without limitation:
When DTC determines that the perceived harm has passed or
is significantly remote;
when the basis for the Restriction no longer exists. For
example, where DTC imposed a Deposit Chill on the basis of plausible
information that certificates were stolen and about to be deposited,
and DTC subsequently receives plausible information that the
certificates have been recovered and will not be deposited, or where
DTC imposed a Deposit Chill based on erroneously issued shares, and
subsequently receives copies of a ``Stop transfer'' \21\ directive and
cancellation of such shares before they have been deposited; or
---------------------------------------------------------------------------

\21\ A ``stop transfer'' is an order made to prevent the
transfer of ownership of a security.
---------------------------------------------------------------------------

when an Eligible Security had been previously Globally
Locked based on a Commission enforcement action but there is no
indication that illegally distributed Securities are about to be
deposited.
C. Proposed Fair Procedures
DTC has developed the procedures in the proposed rule change to
give the Issuer a timely notice of the Restriction, provide the Issuer
an opportunity to submit a written challenge to the Restriction,
provide a review and written determination by an independent officer,
and maintain a complete record of the proceeding, consistent with
Section 17A(b)(3)(H) of the Act \22\ and the Commission's opinion and
order in IPWG.
---------------------------------------------------------------------------

\22\ 15 U.S.C. 78q-1(b)(3)(H).
---------------------------------------------------------------------------

Pursuant to the proposed rule change, DTC would send written notice
(``Restriction Notice'') to the Issuer's last known business address
and to the last known business address of the Issuer's transfer agent,
if any, on record with DTC. The Restriction Notice would be sent within
three Business Days of imposition of a Restriction and would set forth:
(i) The basis for the Restriction; (ii) the date the Restriction was
imposed; (iii) that the Issuer may submit a written response to DTC
detailing the basis for release of the Restriction under proposed Rule
33 (``the Restriction Response''); and (iv) that the Restriction
Response must be received by DTC within twenty Business Days of
delivery of the Restriction Notice.
Once the Restriction Response is received by DTC, the proposed rule
change provides that it would be reviewed by a DTC officer who did not
have responsibility for the imposition of the Restriction. DTC may
request additional information from the Issuer. After the officer's
review is completed, DTC would provide a written decision (a
``Restriction Decision'') to the Issuer.

[[Page 37235]]

Within ten Business Days of delivery of the Restriction Decision, the
Issuer may submit a supplement (a ``Supplement'') for the sole purpose
of establishing that DTC made a clerical mistake or mistake arising
from an oversight or omission in reviewing the Restriction Response.
If the Issuer submits a Supplement, the officer would provide a
supplement decision (a ``Supplement Decision'') within ten Business
Days after the Supplement was delivered. The Restriction Notice, the
Restriction Response, the Restriction Decision, the Supplement, the
Supplement Decision, and any other documents submitted in connection
with these procedures would constitute the record for purposes of any
appeal to the Commission.
The proposed rule change would not affect DTC's ability (A) to lift
or modify a Restriction; (B) to operationally restrict book-entry
services, Deposits or other services in the ordinary course of
business, as such restrictions do not constitute Deposit Chills or
Global Locks for purposes of proposed Rule 33; (C) to communicate with
the Issuer or its transfer agent or representative, if any, provided
that substantive communications are memorialized in writing to be
included in the record for purposes of any appeal to the Commission; or
(D) to send out a Restriction Notice prior to the imposition of a
Restriction.
DTC believes that these procedures comport with Section
17A(b)(3)(H) of the Act, which requires that a registered clearing
agency that denies or limits access to the agency's services to a
``person,'' it must ``provide a fair procedure.'' \23\ Such procedures
require the clearing agency to give the person notice and an
opportunity to address the specific grounds for denial or prohibition
or limitation and to keep a record.\24\ In its decision in IPWG, the
Commission ruled, inter alia, that issuers are ``persons'' for the
purposes of Section 17A(b)(3).\25\
---------------------------------------------------------------------------

\23\ See id.
\24\ See 15 U.S.C. 78q-1(b)(5)(B).
\25\ IPWG, 2012 SEC LEXIS at *24.
---------------------------------------------------------------------------

Section 17A of the Act does not specify the nature of the fair
procedures DTC must provide to ``persons,'' including issuers. In IPWG,
the Commission observed that:

Exchange Act Section 17A(b)(5)(B) states that, when a registered
clearing agency determines that ``a person shall be . . . prohibited
or limited with respect to access to services offered by the
clearing agency, the clearing agency shall notify such person of,
and give him an opportunity to be heard upon, the specific grounds
for . . . prohibition or limitation under consideration and keep a
record.'' \26\
---------------------------------------------------------------------------

\26\ Id.

As stated in IPWG, ``DTC may design such [Section 17A procedures]
in accordance with its own internal needs and circumstances.'' \27\ The
Commission further ruled in IPWG that DTC ``should adopt procedures
that accord with the fairness requirements of Section 17A(b)(3)(H),
which may be applied uniformly'' in the cases where DTC denies or
limits services with respect to an Issuer's Securities.
---------------------------------------------------------------------------

\27\ Id. at *30 n.36.
---------------------------------------------------------------------------

In the Commission's more recent opinion in Atlantis, the Commission
upheld the notice, opportunity to be heard, and recordkeeping that DTC
provided to a Globally Locked issuer. Significantly, the Commission
held that Section 17A of the Act does not require DTC to hold a formal
hearing in order to satisfy its obligations under Section 17A to
provide Issuers with an opportunity to be heard.\28\
---------------------------------------------------------------------------

\28\ Id. at *19.
---------------------------------------------------------------------------

DTC believes that the procedures in proposed Rule 33 for giving
notice of the Restriction to the Issuer with an opportunity to be heard
are consistent with the fair procedures upheld by the Commission in
Atlantis. In addition, consistent with the Commission's broad directive
in IPWG, DTC believes that the proposed rule would establish uniform
standards for the imposition of Restrictions, as well as the fair
procedures for Issuers whose Securities are subject to a Restriction.
Implementation Timeframe
DTC will announce the effective date via Important Notice upon the
Commission's approval of the proposed rule change.
2. Statutory Basis
DTC believes that the proposed rule change is consistent with the
requirements of the Act, and the rules and regulations thereunder
applicable to DTC, in particular Section 17A(b)(3)(F) of the Act \29\
and Section 17A(b)(3)(H) of the Act.\30\
---------------------------------------------------------------------------

\29\ 15 U.S.C. 78q-1(b)(3)(F).
\30\ 15 U.S.C. 78q-1(b)(3)(H).
---------------------------------------------------------------------------

Section 17A(b)(3)(F) of the Act \31\ requires, inter alia, that the
rules of the clearing agency be designed to promote the prompt and
accurate clearance and settlement of securities transactions, and to
assure the safeguarding of securities and funds which are in the
custody or control of the clearing agency or for which it is
responsible. By establishing a framework for DTC to impose and release
Restrictions, the proposed rule change would provide a mechanism for
DTC to act quickly and efficiently to screen out, prior to deposit, or
restrict, after deposit, Securities for which trading has been
prohibited by the Commission, FINRA, or a court of competent
jurisdiction, or which pose a threat of imminent adverse consequences
to DTC or its Participants, to assure the safeguarding of Securities
deposited to and held by DTC, consistent with the requirements of the
Act, in particular Section 17A(b)(3)(F) of the Act, cited above.
---------------------------------------------------------------------------

\31\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

Section 17A(b)(3)(H) of the Act, requires, inter alia, that the
rules of a clearing agency are in accordance with the provisions of
Section 17A(b)(5)(B) of the Act,\32\ and in general provide a fair
procedure with respect to the prohibition or limitation by the clearing
agency of any person with respect to access to services offered by the
clearing agency. By establishing a procedure that would provide for:
(A) Criteria for notice to an Issuer that a Deposit Chill or Global
Lock has been imposed; (B) an explanation of the specific grounds upon
which any Restriction has been imposed; (C) the actions that the Issuer
may take to object to the Restriction; (D) the process DTC would
undertake to review written submissions of the Issuer and to render a
final decision concerning the Restriction; (E) the grounds upon which
DTC may release the Restriction; and (F) the maintenance of a complete
record for submission to the Commission in the event an Issuer appeals,
the proposed rule change would provide Issuers with fair procedures
with respect to Deposit Chills and Global Locks, consistent with the
requirements of the Act, in particular Section 17A(b)(3)(H) of the Act,
cited above.\33\
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\32\ Section 17A(b)(5)(B) of the Act, 15 U.S.C. 78q-1(b)(5)(B)
provides: ``In any proceeding by a registered clearing agency to
determine whether a person shall be denied participation or
prohibited or limited with respect to access to services offered by
the clearing agency, the clearing agency shall notify such person
of, and give him an opportunity to be heard upon, the specific
grounds for denial or prohibition or limitation under consideration
and keep a record. A determination by the clearing agency to deny
participation or prohibit or limit a person with respect to access
to services offered by the clearing agency shall be supported by a
statement setting forth the specific grounds on which the denial or
prohibition or limitation is based.''
\33\ 15 U.S.C. 78q-1(b)(3)(H).
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(B) Clearing Agency's Statement on Burden on Competition

DTC does not believe that the proposed rule change would have any
impact on, or impose any burden on competition that is not necessary or

[[Page 37236]]

appropriate in furtherance of the purposes of the Act, because the
proposed procedures as described above would apply to all Eligible
Securities that may be subject to a Deposit Chill or Global Lock.

Written comments relating to the proposed rule change have not been
solicited or received with respect to this filing. To the extent DTC
receives written comments on the proposed rule change DTC will forward
such comments to the Commission.

III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action

Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.

IV. Solicitation of Comments

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-DTC-2016-003 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-DTC-2016-003. 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 DTC and on DTCC's
Web site (https://dtcc.com/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-2016-003 and should be
submitted on or before June 30, 2016.
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\34\ 17 CFR 200.30-3(a)(12).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
Brent J. Fields,
Secretary.
[FR Doc. 2016-13614 Filed 6-8-16; 8:45 am]
BILLING CODE 8011-01-P

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