Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing of Proposed Rule Change to Allow for the Deposit of Electronic Certificates of Deposit and Technical Changes, 78371-78381 [2020-26676]
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Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices
information to perform the necessary
regulatory functions associated with
listing and trading the Shares on the
Exchange, including the ability to
monitor compliance with the initial and
continued listing requirements as well
as the ability to surveil for manipulation
of the Shares.
In addition, Form N–PORT requires
reporting of a fund’s complete portfolio
holdings on a position-by-position basis
on a quarterly basis within 60 days after
fiscal quarter end. Investors can obtain
a fund’s Statement of Additional
Information, its Shareholder Reports, its
Form N–CSR, filed twice a year, and its
Form N–CEN, filed annually. A fund’s
SAI and Shareholder Reports are
available free upon request from the
Investment Company, and those
documents and the Form N–PORT,
Form N–CSR, and Form N–CEN may be
viewed on-screen or downloaded from
the Commission’s website at
www.sec.gov. The Exchange also notes
that the Exemptive Relief provides that
the Funds will comply with Regulation
Fair Disclosure, which prohibits
selective disclosure of any material nonpublic information, which otherwise do
not apply to issuers of Tracking Fund
Shares.
Information regarding market price
and trading volume of the Shares will be
continually available on a real-time
basis throughout the day on brokers’
computer screens and other electronic
services. Information regarding the
previous day’s closing price and trading
volume information for the Shares will
be published daily in the financial
section of newspapers. Quotation and
last sale information for the Shares will
be available via the CTA high-speed
line. The Exchange deems Tracking
Fund Shares to be equity securities, thus
rendering trading in the Shares subject
to the Exchange’s existing rules
governing the trading of equity
securities. As provided in Rule
14.11(m)(2)(C), the minimum price
variation for quoting and entry of orders
in securities traded on the Exchange is
$0.01.
For the above reasons, the Exchange
believes that the proposed rule change
is consistent with the requirements of
Section 6(b)(5) of the Act.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purpose of the Act. Rather, the
Exchange notes that the proposed rule
change will facilitate the listing of
several new series of actively-managed
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exchange-traded product, thus
enhancing competition among both
market participants and listing venues,
to the benefit of investors and the
marketplace.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has neither solicited
nor received written comments on the
proposed rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing 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, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 26 and Rule 19b–
4(f)(6) thereunder.27
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
the purposes of the Act.
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–
CboeBZX–2020–085 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.
26 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires a self-regulatory organization to
give the Commission written notice of its intent to
file the proposed rule change, along with a brief
description and 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. The Exchange
has satisfied this requirement.
27 17
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78371
All submissions should refer to File
Number SR–CboeBZX–2020–085. 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 website (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 website 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.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CboeBZX–2020–085 and
should be submitted on or before
December 28, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.28
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–26675 Filed 12–3–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–90534; File No. SR–DTC–
2020–017]
Self-Regulatory Organizations; The
Depository Trust Company; Notice of
Filing of Proposed Rule Change to
Allow for the Deposit of Electronic
Certificates of Deposit and Technical
Changes
November 30, 2020.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
28 17
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CFR 200.30–3(a)(12).
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Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on November
20, 2020, 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 the clearing agency. 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 3 consists of
amendments to the Procedures 4 of DTC.
Specifically, the proposed rule change
would amend the OA and Underwriting
Service Guide to implement a new
application and secured electronic vault
(‘‘E-vault’’) for requests for eligibility,
execution, Delivery and storage of
certificates of deposit (‘‘CDs’’) that are
issued by state and federal chartered
banks that are Eligible Securities 5 in
electronic form. Technical changes with
respect to spelling, punctuation and
spacing of text would also be made. The
use of the new application and E-vault
would replace an existing legacy
platform and paper-based model for
Delivery and storage of CDs maintained
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Capitalized terms not defined herein are defined
in the Rules, By-Laws and Organization Certificate
of DTC (the ‘‘Rules’’), available at www.dtcc.com/
∼/media/Files/Downloads/legal/rules/dtc_rules.pdf,
the DTC Operational Arrangements (Necessary for
Securities to Become and Remain Eligible for DTC
Services) (‘‘OA’’), available at https://
www.dtcc.com/∼/media/Files/Downloads/legal/
issue-eligibility/eligibility/operationalarrangements.pdf, and the DTC Underwriting
Service Guide (‘‘Underwriting Service Guide’’),
available at https://www.dtcc.com/∼/media/Files/
Downloads/legal/service-guides/UnderwritingService-Guide.pdf.
4 The OA and the Underwriting Service Guide
constitute Procedures of DTC. Pursuant to the
Rules, the term ‘‘Procedures’’ means the
Procedures, service guides, and regulations of DTC
adopted pursuant to Rule 27, as amended from time
to time. See Rule 1, Section 1, supra note 3. DTC’s
Procedures are filed with the Commission. They are
binding on DTC and each Participant in the same
manner as they are bound by the Rules. See Rule
27, supra note 3. The OA is also binding on each
issuer and agent of an Eligible Security. See OA,
supra note 3 at 5, supra note 3. DTC also maintains
service guides that constitute Procedures relating to
services it offers. Available at https://www.dtcc.com/
legal/rules-and-procedures?subsidiary=DTC&pgs=1.
5 Generally, Eligible Securities must have been
issued in a transaction (i) registered with the
Commission pursuant to the Securities Act; (ii)
exempt from registration pursuant to a Securities
Act exemption without transfer or ownership
restrictions; or (iii) pursuant to Rule 144A, 17 CFR
230.144A, or Regulation S, 17 CFR 230.901–
230.905, under the Securities Act. See OA, supra
note 3 at 2–3.
2 17
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in DTC’s secured physical vault, as
more fully described below.
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 proposed rule change of DTC
would amend the Procedures of DTC.
Specifically, the proposed rule change
would amend the OA and Underwriting
Service Guide to implement a new
application and secured E-vault for
requests for eligibility, execution,
Delivery and storage of CDs that are (i)
Eligible Securities and (ii) issued by
state and federal chartered banks in
electronic form. The use of the new
application and E-vault would replace
an existing legacy platform for Delivery
and storage of CDs maintained in DTC’s
secured physical vault, as more fully
described below.
Background
DTC (i) makes eligible for Deposit,
processes and holds physical retail CDs
issued by various U.S. banks and
Deposited by Participants and (ii)
credits interests in those CDs to
Participant’s Securities Accounts.6 As
described below, the use of physical
certificates presents operational
concerns to Participants and to DTC and
DTC has undertaken efforts to promote
dematerialization of Securities. To
address operational concerns relating to
processing of physical CDs, DTC has
developed a system that would
eliminate the need for physical
certificates for certain issue types of CDs
by allowing them to be issued and held
in electronic form, as described below.
Upon implementation, the proposed
rule change would address operational
concerns of Participants relating to the
amount of time and manual effort
currently required for the issuance and
redemption of physical CDs by allowing
for a fully electronic process for the
execution and Delivery of the affected
6 See
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OA, supra note 3, at 9–10.
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CD certificates. As such, the proposed
rule change would also reduce the need
for DTC to (i) perform manual
processing relating to CD Deposits and
(ii) reserve space in its secure physical
vault currently used for CDs by allowing
for the storage of CDs in electronic form
in a secure E-vault.
The proposed electronic process
would also address concerns relating to
potential disruptions in the physical
transport of paper CDs to DTC currently
made using courier and overnight
delivery services. Such disruptions may
be caused by weather-related issues,
such as Superstorm Sandy which
impacted physical securities processing
in 2012, and other previously
unforeseen circumstances, such as the
COVID–19 pandemic. Although, DTC
has been able to maintain securities
eligibility and processing operations
during such circumstances, including
by utilizing a letter of securities
possession 7 (‘‘LOP’’) process that
enables DTC to accept Delivery of
securities represented in physical form
even if the circumstances prevent
physical delivery at that time, such
disruptions could delay the Deposit of
CDs and impact the timely closing of
issuances and otherwise affect liquidity
in the marketplace for CDs.
Current DTC Eligibility Process for CDs
Only Participants can request that
DTC make a Security eligible for
Deposit.8 It is therefore incumbent on an
issuer to have a relationship with an
underwriter or other financial
institution that is a Participant, or is
directly associated with a Participant,
that is willing to sponsor the eligibility
process for the issuer’s Securities.9 A
Participant may submit a Deposit
eligibility request for a CD through the
underwriting services of DTC at the time
a security is initially being offered and
distributed to the marketplace or at a
later time for already issued and
outstanding securities.10
Participants must provide an
eligibility request for the specified
securities to Underwriting by submitting
all required issuer and securities data
and all related offering documents, at a
minimum, through the online Securities
Origination, Underwriting and Reliable
Corporate Action Environment (‘‘UW
SOURCE’’) system.11
CDs are book entry-only (‘‘BEO’’)
Securities 12 registered to DTC’s
7 See Underwriting Service Guide, supra note 3
at 17.
8 See id. at 1.
9 Id.
10 Id.
11 Id. at 2.
12 Id. at 4.
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nominee, Cede & Co. BEO Securities are
DTC-eligible Securities for which (i)
physical certificates are not available to
investors and (ii) DTC, through its
nominee, Cede & Co., will hold the
entire balance of the offering, either at
DTC (in physical form) or through a
FAST Agent in DTC’s Fast Automated
Securities Transfer (‘‘FAST’’) program.
Issuers of BEO Securities must submit to
DTC a Letter of Representations (‘‘LOR’’)
among the issuer, its agent (as
applicable) and DTC, prior to such issue
being determined to be eligible. For
corporate and municipal securities,
there are two acceptable forms of LOR:
A Blanket Issuer Letter of
Representations (‘‘BLOR’’) or an Issuer
Letter of Representations (‘‘ILOR’’). A
BLOR is issuer specific and applicable
to all DTC-eligible securities (debt and/
or equity) of the same issuer. Once a
BLOR is on file for an issuer, a new
BLOR is not required for future
issuances unless the issuer’s name
changes (in which case an opinion of
counsel may also be required). An ILOR
may be used for discrete issuances, and
is applicable only to that issue of
securities, such as trust issuances. Each
issuer of a BEO Security must submit to
DTC a fully executed LOR on DTC’s
preprinted form. This LOR represents
the issuer’s agreement to comply with
the requirements set forth in the OA, as
amended from time to time.13
Once DTC has determined to make a
Security eligible, a Participant may
Deposit the Security at DTC for
crediting to its Securities Account. For
a CD issuance, the issuing bank and
Depositing Participant must coordinate
the execution and Delivery of the
physical certificate to DTC in order for
the Participant to timely receive credit
by the anticipated closing date.14 Once
DTC receives an acceptable Deposit of
an eligible CD from a Participant, DTC
credits a Security Entitlement 15 in the
13 Id.
14 See DTC Deposits Service Guide (‘‘Deposits
Guide’’), available at https://www.dtcc.com/∼/
media/Files/Downloads/legal/service-guides/
Deposits.pdf, at 8. The closing date is the date on
which Underwriting will distribute an issue to the
underwriter’s Participant account at DTC for bookentry delivery and settlement upon notification by
both the underwriter and the issuer that an issue
has closed (i.e., the distribution date). See
Underwriting Guide, supra note 3, at 6. On the
closing date, when an issuer or its agent and the
underwriter confirm with DTC that the issue has
closed and verifies pertinent data, DTC releases the
position from an internal DTC account and credits
the underwriter’s Participant account, provided that
DTC received the certificates. See id. at 9.
15 Pursuant to Rule 1, the term ‘‘Security
Entitlement’’ has the meaning given to the term
‘‘security entitlement’’ in Section 8–102 of the New
York Uniform Commercial Code (‘‘NYUCC’’). See
Rule 1, supra note 3. See also NYUCC 8–102. The
interest of a Participant or Pledgee in a Security
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CD to the Participant’s Securities
Account 16 and DTC holds the original
paper certificate in its secure vault for
the duration of the term of the CD.
Proposal
Pursuant to the proposed rule change,
DTC is proposing to launch a new
program to support Deposit of electronic
CDs that would be issued by banks (‘‘E–
CDs’’). The program would allow E–CDs
to be electronically generated, signed,
delivered to DTC and held in electronic
form in a secure E-vault.
Upon implementation of the proposed
rule change, CDs of state and federally
chartered banks containing certain
standard terms that conform to one of
four proposed templates (‘‘System E–CD
Templates’’) would be eligible for the
new program, as described below. The
System E–CD Templates were
developed with input from DTC
Participants that act as underwriters of
CD. The templates would cover four
basic types of CDs, specifically (i) Fixed
Rate Non-Callable, (ii) Fixed Rate
Callable, (iii) Step Rate Non-Callable
and (iv) Step Rate Callable.17
After implementation, in order to
facilitate needs of issuers and
underwriters, DTC may, at its own
discretion, (i) edit the System E–CD
Templates and/or (ii) add additional
templates for use in the E–CD program
as published via Important Notice that
would also be deemed System E–CD
Templates. Any edits to the System E–
CD Templates would not affect E–CDs
that were previously issued into DTC.
More complex CDs that do not
conform to the System E–CD Templates,
including those referred to as structured
CDs, would be excluded from the
proposed new process, because they
typically contain terms that are not
amenable to the creation of fixed
templates in the format proposed
herein.
Upon implementation, Participants
would request eligibility for E–CDs that
conform to the System E–CD Templates
through a new system referred to as
Underwriting Central (‘‘UWC’’). UW
SOURCE would continue to remain
available for other types of issuances,
credited to its Account is a Security Entitlement.
See Rule 1, supra note 3.
16 See Deposits Guide, supra note 14, at 8.
17 A Fixed Rate CD pays a fixed interest rate over
the entire term of the CD. A Step Rate CD allows
for increases in the interest rate at specific, intervals
that are pre-defined by the issuer. A Callable CD
contains a call feature that gives the issuing bank
the ability to redeem the CD prior to its stated
maturity, usually within a given time frame and at
a preset call price as set forth in the ‘‘call provision’’
in the master certificate. A certificate without such
a provision cannot not be called by the issuer prior
to maturity date (Non-Callable).
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78373
including the issuances of CDs in
physical form.
In order to request eligibility of a CD
to be issued in electronic form, the
Underwriter would provide all required
information relating to the CD through
UWC, including but not limited to
offering documentation and the terms to
be populated in the electronic
certificate. The relevant data (e.g.,
interest rate(s) and maturity date) will
be populated into the templates as
entered by the underwriter into the
UWC application. It would be the
responsibility of the Underwriter to
disseminate the electronic master
certificate to the issuer for electronic
signature via UWC. The issuer would be
required to electronically sign and
Deliver the master certificate to DTC
prior to closing.
For CDs that do not conform to the
System E–CD Templates, eligibility
request would continue to be entered by
the Underwriter through UW SOURCE
and a physical certificate delivered to
DTC prior to closing.
Whether issued in electronic or
physical form, securities should be
delivered to DTC by no later than noon
Eastern Time on the business day prior
to the Closing Date as currently
specified in Exhibit B of the OA.
In addition, each issuer that opts to
issue E–CDs would be required to
provide a new BLOR designed for use
with the E–CD program, as described
below.
Legal Framework Supporting Issuance
of Electronic CDs
The following discussion is provided
by DTC and includes its own analysis of
applicable state law provisions that DTC
believes supports the validity of the
issuance and Deposit of E–CDs at DTC
pursuant to the proposed rule change.
Based on its analysis, DTC believes that
the proposed rule change would allow
E–CDs to be electronically generated,
signed, Delivered to DTC and held in
electronic form in a secure E-vault
within a legal framework that supports
the validity of E–CDs in a manner
comparable to that of physical issuance
and Deposit of CDs that are eligible for
DTC services pursuant to the Rules and
Procedures. This analysis is not part of
the proposed rule, but a separate,
analysis of applicable law. DTC
emphasizes that neither the following,
nor any aspect of the proposed rule
change, is intended by DTC to be legal
advice by DTC to any Participant, issuer
or other third party, and should not be
considered to be legal advice by DTC to
any Participant, issuer, or other third
party.
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Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices
DTC’s Rules are Governed by the Law of
New York
DTC’s activities and its Rules are
structured in accordance with the laws
of New York and the United States, and
provide that they shall be governed by,
and construed in accordance with, the
law of New York.18 A principal law
comprising the legal framework under
which DTC operates includes, but is not
limited to, the NYUCC, which among
other things, supports a legal framework
for the issuance of Securities and the
indirect holding system, under which
DTC credits in Securities to its
Participants.
NYUCC and Electronic Signature Laws;
and Impact Regarding E–CDs
CDs are ‘‘negotiable instruments’’
under Article 3 of the Uniform
Commercial Code (the ‘‘UCC’’),19 which
has been adopted in New York under
the NYUCC,20 and, depending on how
they are structured, may also be
‘‘securities’’ and/or ‘‘financial assets,’’
as defined in Article 8 of the UCC,
which has been adopted in New York
under the NYUCC.21 In addition,
because the CDs are held in DTC
through the indirect holding system, the
rights and duties of DTC, as a securities
intermediary, and its Participants, as
entitlement holders, are governed by
Part 5 of Article 8 of the UCC,22 also
adopted in New York under the
NYUCC. In this regard, the rights and
obligations associated with CDs held at
DTC are governed by the relevant
provisions of the NYUCC.
Section 8–110 of the UCC provides
that only the law of the issuer’s
jurisdiction will govern the ‘‘validity’’ of
a ‘‘security’’—the laws of another
jurisdiction cannot be selected to govern
validity issues. The term ‘‘validity’’ is
not defined in the UCC. DTC believes
that laws governing the creation and
existence of an electronic record as a
substitute for a written instrument may
be viewed as laws that govern the
‘‘validity’’ of an instrument.23
18 See
Rule 2, supra note 3.
otherwise specified, citations in this
proposed rule change to provisions of the UCC are
to the UCC as adopted in New York under the
NYUCC.
20 See NYUCC 3–102 and 3–104 (defining CDs as
negotiable instruments).
21 See NYUCC 8–102 (for NYUCC definitions of
‘‘financial asset’’ and ‘‘security’’).
22 See NYUCC 8–501–8–508.
23 See Comment 2 to Section 8–110 of the UCC
(explaining that the law of the issuer’s jurisdiction
governs the validity of a security in order to ensure
that a single body of law governs the questions
addressed in Part 2 of Article 8). Part 2 of Article
8 of the UCC describes the circumstances in which
an issuer can and cannot assert invalidity as a
defense against purchasers, including lack of
19 Unless
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An E–CD that is both a negotiable
instrument and a security, will be
governed as to its validity by the law of
the issuer’s jurisdiction, by virtue of
Section 8–110 of the UCC. If the validity
of a security is determined to include its
electronic nature, then the electronic
signature and record laws of each
individual issuer’s jurisdiction would
apply to each E–CD. Therefore,
requiring an E–CD to be a security could
adversely impact the valid issuance of
the E–CD if the laws of the issuer’s
jurisdiction do not contemplate the
electronic signature of a security.
However, as discussed below, Article
3 negotiable instruments allow for a
choice of law. In this regard, DTC
believes that requiring E–CDs to be
issued as negotiable instruments would
facilitate the valid issuance of E–CDs
regardless of an issuer’s jurisdiction, so
long as the law of a jurisdiction that
contemplates the use of electronic
signatures as part of a valid issuance is
chosen to govern the E–CD.
As more fully described in the
discussion of electronic signature laws
provided by DTC below, DTC proposes
to apply New York law for this purpose,
but also proposes to design the E–CD
program such that E–CDs issued into
DTC would be valid under the laws of
all states that allow the use of electronic
records and signatures in any
transaction that would otherwise
require a paper document and/or wetink signature.
Discussion of Electronic Signature Laws
The New York Electronic Signatures
and Records Act
The New York Electronic Signatures
and Records Act 24 (‘‘ESRA’’) governs
the validity of electronic records and
signatures in New York. ESRA is like
UETA in that it accords the same power
and effect to electronic records and
signatures as would otherwise be
accorded to writings under New York
law.
ESRA does not apply to negotiable
instruments, such as CDs, unless an
electronic record of such instrument is
created, stored or transferred in a
manner that meets the Uniqueness
Standard. If the Uniqueness Standard is
met, then CDs that are issued, created
and signed electronically have the same
power and effect as paper CDs under
New York law.
genuineness, unauthorized signatures and
incomplete certificates. This implies that the term
‘‘validity’’ in Section 8–110 of the UCC refers to a
broader set of issues than just the validity of
issuance of the security under the issuer’s
governing documents and local law.
24 N.Y. State Tech. Law § 30[•] (McKinney 2012).
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The Uniform Electronic Transactions
Act
The Uniform Electronic Transactions
Act 25 (‘‘UETA’’), has been adopted in
various forms by 47 U.S. states.26 UETA
generally allows parties to agree to use
electronic records and signatures in any
transaction that would have otherwise
required a paper document and/or wetink signature.
Section 16 of UETA 27 provides legal
support for the creation, transferability
and enforceability, of, among other
things, negotiable instruments such as
CDs, if they meet the following
standards:
• The E–CD must be a ‘‘transferable
record,’’ which is defined, in part, as an
electronic record that would be a note
under Article 3 of the UCC (CDs are
notes in all relevant UETA
jurisdictions), and the issuer has
expressly agreed that it is a transferable
record.
• The E–CD must initially be created
as an electronic record, and not as a
paper document that is converted to
one.28
• Each E–CD must be stored in a
system that meets the following
standards (the ‘‘Section 16 Safe
Harbor’’):
Æ The E–CD is created, stored and
assigned in a manner that a single
authoritative copy of the transferable
record exists which is unique,
identifiable and, subject to certain
exceptions, unalterable (the
‘‘Uniqueness Standard’’).
Æ The authoritative copy must (i)
identify the person claiming control
(i.e., the person to which the
transferable record was issued or
transferred), (ii) be maintained by the
person claiming control or its designee
and (iii) be unalterable except with the
permission of the person claiming
control.
Æ Copies of and authorized revisions
to the authoritative copy must be clearly
marked as such.
DTC believes that any E–CD that is a
transferable record and is stored in a
system that falls within the Section 16
25 Unif. Electronic Transactions Act (Unif. L.
Comm’n 1999).
26 Illinois, New York and Washington have not
adopted UETA. Although it has adopted UETA,
California has not adopted Section 16 of UETA,
which, as described in further detail below, is the
section of UETA that provides for the electronic
creation, signature and storage of negotiable
instruments such as CDs.
27 Unif. Elec. Transactions Act § 16 (Unif. L.
Comm’n 1999).
28 See Comment 2 to Section 16 of UETA
(explaining that Section 16 is not intended to cover
the conversion of a paper note to an electronic
record; instead, transferable records must be
electronic at the time they are created).
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Safe Harbor will have the same rights
and obligations of an equivalent writing
under the UCC.29
Because the Section 16 UETA
provisions are more robust than ESRA
and the guidance in Section 16 of UETA
is more developed, the E–CDs that
would be made eligible by DTC would
be structured to meet the requirements
of UETA, including the Section 16 Safe
Harbor, even though, as discussed
below, the E–CDs will also be structured
so that they are governed by New York
law (including ESRA).30 This construct
will help ensure that an E–CD also will
remain valid in the jurisdictions that
have adopted Section 16 of UETA, in
the unlikely event that a court of
competent jurisdiction would determine
not to recognize the selection of New
York law.
UETA and contains a section that is
analogous to Section 16 of UETA.
Washington adopted an electronic
records and signatures law that is very
different than UETA and does not
clearly contemplate or provide for the
issuance of electronic negotiable
instruments such as CDs. As noted
above, California has not adopted
Section 16 of UETA. Therefore DTC is
unable to conclude whether CDs that are
created, signed and stored electronically
would be valid under Washington or
California law because it has not
identified a legal framework under those
laws whereby an issuer could issue a
valid E–CD that could in turn be
Deposited at DTC in accordance with
the proposed rule change.
E-Sign
The federal Electronic Signatures in
Global and National Commerce Act 31
(‘‘E-Sign’’) generally provides for the
legal effect, validity and enforceability
of electronic signatures and records
relating to transactions in interstate or
foreign commerce and preempts state
law with respect to such transactions
except to the extent the state has
enacted UETA or other alternative
procedures or requirements that are
consistent with E-Sign. E-Sign generally
tracks the provisions of UETA but does
not apply to transactions that are
governed by the UCC, such as the
issuance of CDs. E-Sign’s equivalent of
Section 16 of UETA expressly limits the
use of transferable records to debt
obligations secured by an interest in real
property (i.e., mortgage notes). Instead,
state law must provide for the electronic
creation and signature of a CD for it to
be valid.
Pursuant to the proposed rule change,
DTC would amend the OA and
Underwriting Service Guide, and create
a new BLOR and the System E–CD
Templates to be used exclusively for the
issuance of E–CDs, in order to
implement the proposed UWC system
and E-vault for the issuance Delivery
and Deposit of E–CDs and put in place
the Procedures and a framework that
conforms to the legal requirements for
the maintenance of valid E–CDs, as
described above.
Others
In addition to New York, Illinois and
Washington also did not adopt UETA.
Illinois adopted an electronic records
and signatures law that is similar to
29 Because Section 16 of UETA only contemplates
a transferable record that has been electronic since
its creation and requires that the transferable record
comply with the Section 16 Safe Harbor, including
the Uniqueness Standard, at all times, DTC believes
that the legal issues relating to the electronic
signature of a negotiable instrument such as a CD
are necessarily intertwined with its electronic
creation and storage. Thus, an electronic negotiable
instrument cannot be created outside of an
appropriate system that complies with the Section
16 Safe Harbor even if electronically signed.
30 Although Section 307 of ESRA does not
provide the same robust provisions and
commentary as Section 16 of UETA, it is still
sufficiently clear that E–CDs that meet the
Uniqueness Standard are valid.
31 Electronic Signatures in Global and National
Commerce 15 U.S.C. § 70[•].
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Proposed Rule Changes
Each Issuer that Opts to Participate in
the E–CD Program Would Sign a New
BLOR.
Pursuant to the proposed rule change,
the OA would require each E–CD issuer
to submit a new BLOR (‘‘E–CD BLOR’’)
to DTC through UWC prior to its first
issuance of E–CDs. In order to minimize
the additional provisions in the
Electronic Master Certificate (as defined
below), the E–CD BLOR would contain
supplemental terms related to the E–CD
program (in addition to the
representations that are currently
included in a BLOR). The new E–CD
BLOR would provide that all E–CDs
issued in connection therewith and
under one of the base CUSIP numbers
set forth on the face of the E–CD BLOR
would be part of the same transaction in
which the E–CD BLOR was executed.32
Pursuant to Section 3–119 of the UCC,
a holder in due course of a negotiable
instrument must have notice of any
separate agreement in order to be
subject to its limitations. Therefore, the
Electronic Master Certificate (as defined
32 Section 3–119 of the NYUCC provides that a
negotiable instrument may be ‘‘modified or affected
by any other written agreement executed as part of
the same transaction.’’
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below) would contain a reference to the
new E–CD BLOR.33
Each Issuer Issuing E–CDs Would
Electronically Sign and Issue an
Electronic Master Certificate.
E–CDs would be issued on a new form
of master electronic certificate
(‘‘Electronic Master Certificate’’) that
has been specially created for the E–CD
program. A separate electronic Master
Certificate would be issued by the issuer
for each broker that participates in an E–
CD offering. Because E–CDs must
necessarily be created, signed and
thereafter maintained in electronic form
using a system that complies with the
Section 16 Safe Harbor, including the
Uniqueness Standard, DTC would only
make eligible E–CDs that have been
initiated by the related broker/dealer
through UWC, then created, signed and
submitted to DTC through an electronic
signature system designed by DTC for
this purpose. UWC would allow
Participants to initiate a new E–CD
issuance by creating a draft Electronic
Master Certificate using the applicable
System E–CD Template that would be
sent to an issuer for verification and
signature. The issuer will verify and
affix its electronic signature to the
Electronic Master Certificate created by
the Participant in a manner that creates
an executed Electronic Master
Certificate that complies with the
Uniqueness Standard.
Once Issued, Each Original Electronic
Master Certificate Would be
Automatically Stored in an Electronic
Vault Repository.
Once an issuer verifies and affixes its
electronic signature to an Electronic
Master Certificate, the Electronic Master
Certificate would be automatically
stored in an E-vault repository that
complies with the Section 16 Safe
Harbor, and the Electronic Master
Certificate would immediately be
deemed ‘‘Delivered’’ to DTC. The Evault will identify Cede & Co. as the
person to which the Electronic Master
Certificate was issued. The E-vault will
maintain an audit trail that will track all
events that occur with respect to the
Electronic Master Certificate, including
any authorized changes, such as
notations to reflect withdrawals, which
will be noted in the audit trail instead
of on the body of the Electronic Master
Certificate. The audit trail will be
incorporated as part of the Electronic
33 While a CD cannot expressly be made subject
to the terms of an additional agreement, Section 3–
105(1)(c) of the UCC permits the CD to refer to or
state that it arises out of a separate agreement.
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Master Certificate in accordance with
the BLOR.
E–CDs Would be Governed by New
York Law.
The parties would select New York
law as the governing law for all E–CDs,
as described below. Because there are
variations between the electronic record
and signature laws (including in the
provisions of UETA, as adopted) across
the various U.S. jurisdictions, the
selection of New York law (including
ESRA) as the law governing the E–CDs
would allow DTC to structure a single
E–CD program that will be valid for
issuers in all U.S. jurisdictions.
DTC believes that the System E–CD
Templates for the E–CDs and the
proposed BLOR to be used for E–CD
issuances have been structured in a
manner that complies with the
applicable rules governing jurisdiction
selection, as follows:
• Each BLOR would provide that the
laws of New York would govern the
terms of the E–CD, which is issued and
payable to DTC in New York. The
jurisdiction selection rule in Section 1–
301 of the UCC, which applies to CD
issuances under Article 3 of the UCC,
allows parties to a transaction that bears
a reasonable relation to a state to select
the laws of that state to govern their
rights and duties.
• Each Electronic Master Certificate
would have a minimum denomination
of $250,000. The jurisdiction selection
rule in Section 5–1401 of the New York
General Obligations Law allows parties
to any transaction that results in an
obligation of at least $250,000 to select
New York law to govern their rights and
obligations.
• Each Electronic Master Certificate
would expressly provide that it is
payable in New York. The general rule
in New York (and in most other
jurisdictions) is that a note (such as a
CD) that is executed in one state and
payable in another, is governed as to its
nature, validity, interpretation and
effect by the laws of the state where it
is made payable.
E–CDs Would be Structured as
‘‘financial assets’’—but not as
‘‘Securities’’—Under Article 8 of the
UCC.
Section 8–110 of the UCC provides
that only the law of the issuer’s
jurisdiction will govern the ‘‘validity’’ of
a ‘‘security’’—the laws of another
jurisdiction cannot be selected to govern
validity issues. The term ‘‘validity’’ is
not defined in the UCC. DTC believes
that laws governing the creation and
existence of an electronic record as a
substitute for a written instrument may
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be viewed as laws that govern the
‘‘validity’’ of an instrument.34
CDs may be both ‘‘negotiable
instruments’’ under Article 3 of the UCC
and ‘‘securities’’ under Article 8 of the
UCC, in which case the provisions of
Article 8 will govern the CD.35 This
means that an E–CD that is both a
negotiable instrument and a security,
will be governed as to its validity by the
law of the issuer’s jurisdiction, by virtue
of Section 8–110 of the UCC. If the
validity of a security is determined to
include its electronic nature, then the
electronic signature and record laws of
each individual issuer’s jurisdiction
would apply to each E–CD, and the
selection of New York’s ESRA would
not be valid. As a result, any
jurisdiction that has not enacted a law
that clearly provides for electronic
negotiable records would necessarily
have to be excluded from the E–CD
program.36
In order to ensure that the parties can
properly choose New York law,
including ESRA, to govern the E–CDs,
E–CDs would be structured so that they
are not Article 8 Securities. To do this,
each Electronic Master Certificate would
provide that it can be transferred only
by delivery and indorsement. A
‘‘security,’’ as defined in Section 8–
102(a)(15) of the UCC, must be in
‘‘bearer’’ or ‘‘registered’’ form. ‘‘Bearer
form’’ requires that the security be
payable to bearer. Because each
Electronic Master Certificate would be
payable to Cede & Co., as nominee for
DTC, it would not be in bearer form.
‘‘Registered form’’ requires that transfers
of a security be registered upon books
maintained for that purpose by or on
34 See Comment 2 to Section 8–110 of the UCC
(explaining that the law of the issuer’s jurisdiction
governs the validity of a security in order to ensure
that a single body of law governs the questions
addressed in Part 2 of Article 8). Part 2 of Article
8 of the UCC describes the circumstances in which
an issuer can and cannot assert invalidity as a
defense against purchasers, including lack of
genuineness, unauthorized signatures and
incomplete certificates. This implies that the term
‘‘validity’’ in Section 8–110 of the UCC refers to a
broader set of issues than just the validity of
issuance of the security under the issuer’s
governing documents and local law.
35 See Section 3–103(1) of the UCC (providing
that Article 3 does not apply to investment
securities); Comment 2 to Section 3–103 of the UCC
(explaining that if an instrument is negotiable in
form under Article 3, but is, because of its manner
of use, a ‘‘security’’ under Article 8, Article 8 and
not Article 3 applies); and Section 8–103(d) of the
UCC and Comment 5 to Section 8–103 of the UCC
(providing that a writing that is a security certificate
is governed by Article 8, even though it also meets
the requirements of Article 3).
36 In particular, as noted above, if the E–CDs are
Article 8 securities, then DTC would be unable to
conclude that E–CDs would be valid under the laws
of California and Washington, and issuers in
California and Washington would likely be
excluded from the E–CD program.
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behalf of the issuer, or the security
certificate must so state. Because E–CDs
would be transferrable only by delivery
and indorsement and not on the books
of the issuer, they will not be in
registered form and therefore will not
fall within the definition of ‘‘security’’
in Article 8 of the UCC.
Although the E–CDs would not be
Article 8 securities, under Section 8–
103(d) of the UCC they will still be
‘‘financial assets’’ if held in a securities
account.37 DTC Rule 6 provides, among
other things, that DTC will accept
Securities for deposit and may offer
such other services as are consistent
with its purposes and powers.38
‘‘Securities’’ are defined in the DTC
Rules as anything that would be a
‘‘financial asset’’ under Section 8–102 of
the UCC. The DTC Rules further provide
that any item credited to a securities
account will be deemed a Security
under the DTC Rules and treated as a
financial asset under Article 8 of the
UCC. Accordingly, E–CDs, each of
which will be a financial asset under
Article 8 of the UCC, may be made
eligible by DTC, credited by DTC to the
securities accounts of its participants,
and treated as a ‘‘Security’’ for all
purposes, in each case under the DTC
Rules.
The rules relating to the indirect
holding system, security entitlements
and the rights and duties of securities
intermediaries (e.g., DTC) and
entitlement holders, which are specified
in Part 5 of Article 8 of the UCC, apply
to all financial assets.39 Thus, although
37 Section 8–103(d) of the UCC provides, in part,
‘‘a negotiable instrument governed by Article 3 is
a financial asset if it is held in a securities account.’’
See also, the definition of ‘‘financial asset’’ in
Section 8–102(a)(9) of the UCC, which provides that
any property held by a securities intermediary for
another person in a securities account will be a
financial asset if the securities intermediary has
expressly agreed with the other person that the
property is to be treated as such.
38 DTC’s corporate powers are listed in its
Organization Certificate, which include, among
other things, the receipt on deposit for safe-keeping
money, securities, papers of any kind and any other
personal property for the account of its participants
in connection with DTC’s acting as a clearing
corporation.
39 See Comment 5 to Section 8–103 of the UCC
(explaining that the indirect holding rules apply to
any Article 3 negotiable instrument that is held
through a securities intermediary; Comment 9 to
Section 8–102 of the UCC (explaining that the
indirect holding rules in Part 5 of Article 8 may
apply to financial assets even where the rules in
Parts 2, 3 and 4 of Article 8 do not apply); and
Comment 1 to Section 8–104 of the UCC (explaining
that Article 3 and not Article 8 specifies how one
acquires a direct interest in a bankers’ acceptance,
which is a negotiable instrument under Article 3
and a financial asset under Article 8, and Part 5 of
Article 8 governs the rights of a clearing
corporation’s participants with respect to a bankers’
acceptance that is held by the clearing corporation
on account for its participants).
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the E–CDs would not be securities,
because they would be financial assets,
they may be issued and deposited with
DTC, and DTC can credit security
entitlements therein to its Participants,
as it currently does with respect to
paper CDs.40 E–CDs would be
maintained as fungible bulk by DTC, in
accordance with the requirement in
Section 8–504 of the UCC that a
securities intermediary maintain a
financial asset in a quantity
corresponding to the aggregate of all
security entitlements it has established
therein.41
Summary of Selected E–CD Terms
Section 3–104 of the UCC provides
that a negotiable instrument may only
contain an unconditional promise to
pay a sum certain, a prescribed set of
other obligations and powers, and no
other promise, order, obligation or
power. Because it is unclear exactly
what would constitute an additional
obligation or power, only those
provisions that are necessary to ensure
that a holder can ascertain all of the E–
CDs essential terms 42 would be
included in the Electronic Master
Certificate, either directly, or by
reference to the issuer’s E–CD BLOR.
Selected Terms Contained in the Master
Electronic Certificate
The following terms would be
included in each System E–CD
Template:
• The E–CD would be payable in New
York—this ensures that the E–CD will
be governed by New York law.
• The E–CD is issued in connection
with a BLOR between the issuer and
DTC—this allows for the additional
terms contained in the BLOR to modify
or affect the terms of the E–CD and puts
any holder of the E–CD on notice of the
existence of such additional terms.
• The E–CD is an electronic record
created in accordance with ESRA, and
a transferable record under UETA—this
makes clear the issuer’s intent that the
E–CD be a valid electronic instrument
under both ESRA and UETA.43
40 DTC currently accepts for deposit bankers’
acceptances, which are not Article 8 securities, and
proposes to do the same with respect to the E–CDs.
41 Comment 1 to Section 8–504 of the UCC
explains that Section 8–504 recognizes the reality
that these items are held as fungible bulk and are
not identified to a customer. The language in
Section 8–504 of the UCC applies to all financial
assets (not just securities) and would therefore
provide the basis for holding E–CDs as fungible
bulk, even if they are not Article 8 securities.
42 See Comment 8 to Section 3–105 of the UCC
(‘‘an instrument is not negotiable unless the holder
can ascertain all of its essential terms from its
face’’).
43 Section 16 of UETA requires that the issuer
expressly agree that the E–CD is a transferable
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• The E–CD would be stored in the Evault—this is necessary to understand
how the notation and transfer
provisions in the Electronic Master
Certificate will work.
• The E–CD may be transferred only
by delivery and indorsement—this
ensures that the E–CD would not be an
Article 8 security and, therefore, not
subject to the limitation on jurisdiction
selection with respect to validity.
Selected Terms Contained in the BLOR:
• Paper out provision—this allows
DTC to convert the E–CD to a paper CD,
if deemed necessary, without further
action from the issuer.
• Selection of New York governing
law and jurisdiction—included in the
BLOR to minimize additions to the
Electronic Master Certificate.
• No contravention representation by
the issuer—the issuer is responsible for
ensuring that the issuance of an E–CD
complies with applicable local law and
regulation and the issuer’s governing
documents.
Other Proposed Changes to the OA
In addition to the proposed changes
described above, the OA would be
amended as follows:
a. Section I.A.1. would be amended to
add a reference to UWC, in addition to
UW SOURCE, as a system that may be
used by Participants to submit eligibility
requests. Additionally, the hyperlink to
the website of DTC’s parent, The
Depository Trust & Clearing Corporation
(‘‘DTCC’’) for information on UW
SOURCE will be amended to refer to the
Underwriting section of DTCC’s
website. The proposed changes in this
section would facilitate Participants’
ability to access DTC’s systems for
eligibility requests.
b. Section 1.B.1 relating to the
documentation requirements for BEO
Securities would be amended to add a
new subsection c. with the following
text under a new heading titled
‘‘Electronic Certificates for Retail CDs’’:
Issuers leveraging the use of
electronic master certificates for Retail
CDs must submit to DTC on DTC’s form,
a fully executed BLOR and its
associated Rider, for each base CUSIP
issuing Retail CDs through the
electronic process. For the current form
of the E–CD BLOR please refer to
https://www.dtcc.com/legal/issueeligibility.
In addition, subsection a. of this
Section, which describes the current
Letter of Representation requirements
record. Comment 2 to Section 16 of UETA explains
that it is likely that this agreement will be set forth
in the body of the electronic record.
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for BEO Securities, would be amended
in order to clarify that the requirements
described in that subsection apply to
BEO Securities other than E–CDs,
namely FAST securities or securities
where a physical master certificate is
delivered to DTC.
The proposed changes to this section
would facilitate Participants’ and
issuers’ access to documentation used in
connection with eligibility requests.
c. Section 1.C.1., which relates to
considerations relating to eligibility of
CDs, would be amended to add a
subsection c. that would be titled
‘‘Electronic Master Certificates,’’ to
provide for issuance and Delivery of E–
CDs and a legal disclaimer as follows:
In lieu of issuing and delivering
physical master certificates to DTC, the
Underwriter can facilitate issuance of
Retail CDs for state and federally
chartered banks in electronic form by
using specific master certificate
templates (‘‘System E–CD Templates’’)
provided by DTC through UWC.
The relevant data (e.g., maturity date)
will be populated into a System E–CD
Template as entered by the Underwriter
into the UWC application. It is the
responsibility of the Underwriter to
disseminate the populated electronic
master certificate to the Issuer for
electronic signature via UWC. The
Issuer must electronically sign the
electronic master certificate prior to
closing.
Each electronic master certificate is
stored in a secure electronic vault
maintained by DTC.
For Retail CDs that do not conform to
the System E–CD Templates, a physical
master certificate must be delivered to
DTC prior to closing.
Note: Whether issued in electronic or
physical form, securities should be delivered
to DTC by no later than noon ET on the
business day prior to the Closing Date as
outlined in Exhibit B.
IMPORTANT LEGAL NOTICE:
DTC DOES NOT VALIDATE,
CERTIFY, REPRESENT OR SEEK TO
CONFIRM (i) THE VALIDITY OF THE
DATA ELEMENTS ENTERED BY A
PARTICIPANT, ITS CORRESPONDENT
UNDERWRITERS AND OR VENDORS
INTO UWC (TOGETHER WITH ANY
OTHER PERSON USING UWC, ‘‘UWC
USERS’’) OR (ii) THE FITNESS OF THE
ELECTRONIC MASTER CERTIFICATES
FOR ANY PURPOSE. USE OF UWC
AND/OR ELECTRONIC MASTER
CERTIFICATES BY ANY UWC USER
SHALL BE DEEMED TO CONSTITUTE
A WAIVER OF ANY AND ALL CLAIMS
(WHETHER DIRECT OR INDIRECT)
AGAINST DTC AND ITS AFFILIATES,
AND AN AGREEMENT THAT DTC
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AND ITS AFFILIATES SHALL NOT BE
LIABLE FOR ANY LOSS, COST,
EXPENSE OR LIABILITY IN RELATION
TO THE USE OF UWC AND/OR
DISSEMINATION OR USE OF
RELATED DOCUMENTATION,
INCLUDING MASTER CERTIFICATES
OF DEPOSIT, WHICH ARE PROVIDED
‘‘AS IS.’’
EACH PARTICIPANT AGREES TO
INDEMNIFY AND HOLD HARMLESS
DTC AND ITS AFFILIATES FROM AND
AGAINST ANY AND ALL LOSSES,
DAMAGES, COSTS, JUDGMENTS,
CHARGES AND EXPENSES ARISING
OUT OF OR RELATING TO ANY USE
OF UWC BY THE PARTICIPANT AND/
OR ANY UWC USER, INCLUDING BUT
NOT LIMITED TO ANY ISSUANCES
OF CERTIFICATES OF DEPOSIT AND
RELATED TRANSACTIONS BY SUCH
PERSON OR ITS AFFILIATES,
AGENTS, CUSTOMERS OR
DESIGNEES.’’
This proposed change would facilitate
the implementation and use of System
E–CD Templates, as described above,
and set forth a disclaimer by DTC and
indemnification consistent with the
requirements of DTC’s current Rule and
Procedures which allocate the
responsibility to Participants for the
accuracy of information and
instructions provided by them to DTC
and the indemnification of DTC by
Participants in this regard.44
d. Exhibit B, which sets forth
timeframes for submission of documents
by Participants to DTC Underwriting in
connection with eligibility requests,
would be revised to reflect that the
timeframes described in the exhibit
relate to documents and information
submitted through UWC, in addition to
UW SOURCE. The proposed change to
Exhibit B would align timeframes for
submissions through UWC with those
that apply to submissions to
UWSOURCE.
e. Technical changes with respect to
spelling, punctuation and spacing of
text would also be made. The proposed
technical changes to the OA would
provide enhanced clarity for
Participants and Issuers with respect to
Procedures relating to eligibility
processing and the Deposit of CDs.
Proposed Changes to the Underwriting
Service Guide
a. A glossary description provided for
BLOR in the Underwriting Guide
currently describes a BLOR as an
agreement between DTC and an issuer
of municipal securities. As described
above, a BLOR or LOR is required to be
44 See OA, supra note 3 at ii-iii and Rule 6, supra
note 3.
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submitted with respect to any issue of
BEO Securities which also includes
corporate Securities. Pursuant to the
proposed rule change, the text would be
clarified so that the description of the
term BLOR is not described as limited
to applying only to municipal
Securities. The proposed change to this
glossary description would provide
enhanced clarity for Participants and
Issuers with respect to Procedures
relating to eligibility documentation
required for BEO Securities.
b. Pursuant to the proposed rule
change, DTC would eliminate references
to the Participant Terminal System
(‘‘PTS’’) functions ART and PUND as
these functions have become obsolete.
ART related to inquiries about
transactions of a Participant processed
by DTC and PUND related to inquiries
relating to issues and certificates for
issues held by a Participant. Participant
inquiries may now be directed to the
Client Center available on dtcc.com.45
The proposed rule change would update
the Underwriting Service Guide to
provide clarity for Participants on how
to submit inquires relating to DTC’s
services.46
c. Pursuant to the proposed rule
change, a reference to the IMPP function
in PTS would be deleted. The IMPP
function allowed Participants to view
Important Notices about underwriting,
transfer agents, and money market
instruments (‘‘MMI’’). This function is
not being widely used by Participants.
All DTC Important Notices are
accessible on dtcc.com.47
d. The Section titled ‘‘Packaging
Inquiries’’ provides information and
requirements relating to the delivery of
securities to DTC. Pursuant to the
proposed rule change, DTC would add
the following text under a subheading
titled ‘‘Retail (brokered) Certificates of
Deposit’’ to note the existence of the
proposed process for E–CDs with a
reference to the OA for additional
information:
In lieu of issuing and delivering
physical master certificates to DTC, the
Underwriter can facilitate issuance of
Retail CDs for state and federally
chartered banks in electronic form by
using available master certificate
templates through the Underwriting
Central system (‘‘UWC’’), in accordance
with the provisions of the OA.
Each electronic master certificate
deposited at DTC is stored in a secure
electronic vault maintained by DTC.’’
45 See Securities Exchange Act Release No. 88050
(January 27, 2020), 85 FR 5728 (January 31, 2020)
(File No. SR–DTC–2020–002).
46 Id.
47 See https://www.dtcc.com/legal/importantnotices.
PO 00000
Frm 00077
Fmt 4703
Sfmt 4703
This Section would also include use,
waiver of liability and indemnification
provisions as follows:
IMPORTANT LEGAL NOTE:
DTC DOES NOT VALIDATE,
CERTIFY, REPRESENT OR SEEK TO
CONFIRM (i) THE VALIDITY OF THE
DATA ELEMENTS ENTERED BY A
PARTICIPANT, ITS CORRESPONDENT
UNDERWRITERS AND OR VENDORS
INTO UWC (TOGETHER WITH ANY
OTHER PERSON USING UWC, ‘‘UWC
USERS’’) OR (ii) THE FITNESS OF THE
ELECTRONIC MASTER CERTIFICATES
FOR ANY PURPOSE. USE OF UWC
AND/OR ELECTRONIC MASTER
CERTIFICATES BY ANY UWC USER
SHALL BE DEEMED TO CONSTITUTE
A WAIVER OF ANY AND ALL CLAIMS
(WHETHER DIRECT OR INDIRECT)
AGAINST DTC AND ITS AFFILIATES,
AND AN AGREEMENT THAT DTC
AND ITS AFFILIATES SHALL NOT BE
LIABLE FOR ANY LOSS, COST,
EXPENSE OR LIABILITY IN RELATION
TO THE USE OF UWC AND/OR
DISSEMINATION OR USE OF
RELATED DOCUMENTATION,
INCLUDING MASTER CERTIFICATES
OF DEPOSIT, WHICH ARE PROVIDED
‘‘AS IS.’’
EACH PARTICIPANT AGREES TO
INDEMNIFY AND HOLD HARMLESS
DTC AND ITS AFFILIATES FROM AND
AGAINST ANY AND ALL LOSSES,
DAMAGES, COSTS, JUDGMENTS,
CHARGES AND EXPENSES ARISING
OUT OF OR RELATING TO ANY USE
OF UWC BY THE PARTICIPANT AND/
OR ANY UWC USER, INCLUDING BUT
NOT LIMITED TO ANY ISSUANCES
OF CERTIFICATES OF DEPOSIT AND
RELATED TRANSACTIONS BY SUCH
PERSON OR ITS AFFILIATES,
AGENTS, CUSTOMERS OR
DESIGNEES.
The proposed changes to this section
would facilitate the implementation and
use of System E–CD Templates, as
described above, and set forth a
disclaimer by DTC and indemnification
consistent with the requirements of
DTC’s current Rule and Procedures
which allocate the responsibility to
Participants for the accuracy of
information and instructions provided
by them to DTC and the indemnification
of DTC by Participants in this regard.48
System Access and Information Security
Considerations
A Participant controls access to its
account and transaction information
relating to its holdings and activity in
DTC’s systems through DTCC’s access
48 See Underwriting Service Guide at 2–3, supra
note 3 at ii–iii and Rule 6, supra note 3.
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Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices
coordinator program.49 This program
includes, but is not limited to, controls
on access to UWSOURCE, and would
also encompass UWC access upon
implementation of the proposal. DTC
may provide to the issuer of any
security, including but not limited to
CDs, at any time credited to the Account
of a Participant the name of the
Participant and the amount of the
issuer’s securities so credited, and the
Corporation is authorized to provide
similar information to any appropriate
governmental authority.50 An issuer
must provide authorization annually for
a third party agent to obtain access to an
position information with respect to
Securities of such issuer.51
DTCC, for itself and on behalf of its
subsidiaries, including DTC, maintains
a privacy policy, which among other
things, states that DTCC maintains an
information security program setting
forth standards for maintaining
administrative, technical and physical
safeguards to protect the personal
information provided by users of
services, which would include personal
information provided through the E–CD
program, against accidental, unlawful or
unauthorized destruction, loss,
alteration, access, disclosure or use.
DTCC periodically tests the security
protections of its information systems
and monitors the effectiveness of its
information security controls, systems
and procedures.52
Implementation Timeframes
The proposed rule change would be
implemented by DTC in two phases,
with the first phase beginning after
approval of the proposed rule change by
the Commission and prior to the end of
January 2021.
Initially, underwriters would be
invited to participate, on a voluntary
basis. The underwriters that would
participate in this initial phase are those
that expressed interest in participating
after outreach by DTC to those
Participants that participated in the
development of the proposed E–CD
program. The Participants that would
participate during the first phase are
those Participants that expect to be able
to submit an issuance during this phase
that would meet the requirements of the
proposed E–CD program, as those
requirements are described above. This
phased approach to implementation
would facilitate a smooth transition,
from an operational perspective, for
49 https://www.dtcc.com/client-center/accesscoordinators.
50 See Rule 2, supra note 3.
51 See OA, supra note 3 at 55.
52 See Privacy Policy on DTCC website, available
at https://www.dtcc.com/privacy.
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18:18 Dec 03, 2020
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ultimately making UWC available for all
E–CD offerings of state and federally
chartered banks that conform to the
System Templates.
Subsequently, the E–CD program
would be made available to all
underwriters in early 2021, with the
implementation date of such availability
to be announced via Important Notice.
Upon approval of the proposed rule
change, a legend would be added to the
OA and Underwriting Service Guide
indicating that the applicable provisions
relating to E–CDs would apply only to
(i) issuers whose issuances are
submitted to DTC through UWC and (ii)
Participants that submit and/or hold
eligible issuances submitted through
UWC, during this first phase, until a
date to be announced by DTC via
Important Notice when the E–CD
program would become available, on a
voluntary basis, for all eligible
issuances. This legend would read as
follows:
Applicable provisions relating to
UWC and Electronic Master Certificates
for Certificates of Deposit, as described
herein, apply only to (i) Issuers whose
issuances are submitted to DTC through
UWC, and (ii) Participants that submit
and/or hold eligible issuances submitted
through UWC during an initial phase of
the electronic CD program, until a date
to be announced by DTC via Important
Notice when the E–CD program would
become available, on a voluntary basis,
for all eligible issuances of state and
federally chartered banks. This legend
will be removed upon full
implementation of the E–CD program on
a date to be announced via Important
Notice.
Issuers and underwriters that choose
not to use the new E–CD program could
continue to use the existing process
through UW SOURCE, including
making Deposits using physical
certificates.
2. Statutory Basis
Section 17A(b)(3(F) of the Act
The Clearing Agencies believe that the
Framework is consistent with Section
17A(b)(3)(F) of the Act,53 for the reasons
described below.
Section 17A(b)(3)(F) of the Act 54
requires, inter alia, that the rules of a
clearing agency be designed 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. As described above, the
proposed rule change would provide for
the issuance of Electronic Master
Certificates for E–CDs which would be
53 15
PO 00000
stored in a secure E-Vault, as described
above. Therefore, by providing for the
storage of E–CDs in a secure electronic
vault, the proposed rule change is
designed to assure the safeguarding of
securities which are in the custody or
control of DTC.
Section 17A(b)(3)(F) of the Act also
requires that the rules of the clearing
agency be designed, inter alia, to
promote the prompt and accurate
clearance and settlement of securities
transactions. DTC believes that the
proposed rule change is consistent with
this provision of the Act because DTC
believes that the proposed E–CD
program would reduce closing delays
caused by disruptions to physical
delivery of certificates by eliminating
the need for DTC to receive original
paper master certificates in advance of
CD issuances that would be eligible for
issuance through the new program.
Therefore, by facilitating the potential
reduction of closing delays for issuances
of CDs that utilize the E–CD program,
DTC believes that the proposed rule
change would promote the prompt and
accurate clearance and settlement of
securities transactions.
DTC also believes that the proposed
rule changes are consistent with Section
17A(b)(3)(F), cited above, because by
making technical changes with respect
to spelling, punctuation and spacing of
text within the Procedures, as described
above, the proposed rule change would
provide enhanced clarity for
Participants and Issuers with respect to
Procedures relating to eligibility
processing and the Deposit of CDs. By
providing Participants and Issuers with
enhanced clarity with regard to the
Procedures relating to, and therefore
facilitating eligibility processing and the
Deposit of CDs that may be the subject
of transactions processed through the
DTC system, DTC believes that the
proposed rule change would promote
the prompt and accurate clearance and
settlement of securities transactions
consistent with the Act.
Rule 17Ad–22(e)(1)
Rule 17Ad–22(d)(1) promulgated
under the Act 55 requires that each
registered clearing agency shall
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to provide for a
well-founded, clear, transparent, and
enforceable legal basis for each aspect of
its activities in all relevant jurisdictions.
As described above, DTC believes that
requiring E–CDs at DTC to be negotiable
instruments governed by New York law
would allow for the valid issuance into
U.S.C. 78q–1(b)(3)(F).
54 Id.
Frm 00078
55 17
Fmt 4703
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78379
E:\FR\FM\04DEN1.SGM
CFR 240.1717Ad–22(d)(1).
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DTC of E–CDs of issuers in all relevant
jurisdictions. Therefore, by providing
for E–CDs to be deemed negotiable
instruments governed by New York law,
as described above, DTC believes that
DTC’s Rules and Procedures, as
amended by the proposed rule change,
would provide for a well-founded, clear,
transparent, and enforceable legal basis
for the valid issuance of E–CDs into
DTC from issuers domiciled in any
relevant jurisdiction.
Also, as described above, because
DTC believes the Section 16 UETA
provisions are more robust than ESRA
and the guidance in Section 16 of UETA
is more developed, the proposal
provides would provide that E–CDs that
would be made eligible by DTC would
be structured to meet the requirements
of UETA, including the Section 16 Safe
Harbor, even though, as discussed
above, the E–CDs would also be
structured so that they are governed by
New York law (including ESRA).56 DTC
believes that this construct will help
ensure that an E–CD also would be valid
in the jurisdictions that have adopted
Section 16 of UETA, in the unlikely
event that a court of competent
jurisdiction would determine not to
recognize the selection of New York
law. Therefore, DTC believes that
structuring E–CDs to meet the
requirements of UETA would allow
DTC’s Rules and Procedures to provide
additional support for a well-founded,
clear, transparent, and enforceable legal
basis for the valid issuance of E–CDs
into DTC from issuers domiciled in
jurisdictions that have adopted Section
16 of UETA.
DTC believes that with respect to all
jurisdictions, including those that have
not adopted Section 16 of UETA or
ESRA, the Procedures, as amended
pursuant to the proposed rule change,
would continue to facilitate the issuance
of CDs in physical form into DTC. As
indicated above, the validity of a
physical security does not depend on
the provisions of electronic signature
laws. DTC believes that Article 8 of the
UCC as adopted in all relevant
jurisdictions allows for the physical
issuance of CDs as securities. Therefore,
an issuer from any relevant jurisdiction
would continue to be able to issue valid
CDs in physical form that meet DTC’s
eligibility requirements into DTC.
Therefore, DTC believes that DTC’s
Procedures, as amended pursuant to the
proposed rule change, would continue
to provide a well-founded, clear,
56 Although Section 307 of ESRA does not
provide the same robust provisions and
commentary as Section 16 of UETA, it is still
sufficiently clear that E–CDs that meet the
Uniqueness Standard are valid.
VerDate Sep<11>2014
18:18 Dec 03, 2020
Jkt 253001
transparent, and enforceable legal basis
for the valid issuance of CDs into DTC
from issuers domiciled in any relevant
jurisdiction.
Rule 17Ad–22(e)(10)
Rule 17Ad–22(d)(10) promulgated
under the Act 57 requires that each
registered clearing agency shall
establish, implement, maintain and
enforce written policies and procedures
reasonably designed, inter alia, to, as
applicable, establish and maintain
operational practices that manage the
risks associated with such physical
deliveries. As mentioned above, the
proposed rule change would eliminate
the requirement for the delivery of a
physical master certificate for a CD
offering to the extent it is eligible for,
and processed through, the electronic
process established through UWC, and
stored in the E-Vault. DTC believes the
proposed electronic process for Delivery
of E–CDs to DTC would reduce risks of
loss related to the physical CDs that
would otherwise be physically
transported to DTC for Deposit and later
returned to issuers or their agents for
redemption upon maturity of the CD.
Therefore, by reducing the risk of loss
of physical master certificates by
allowing their replacement with
Electronic Master Certificates, DTC
believes that the proposed rule change
would establish and maintain
operational practices that manage risks
associated with eligible offerings of CDs,
as described above.
Rule 17Ad–22(e)(11)
Rule 17Ad–22(e)(11) promulgated
under the Act 58 requires that each
covered clearing agency shall establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to, as applicable,
when the covered clearing agency
provides central securities depository
services: (i) Maintain securities in an
immobilized or dematerialized form for
their transfer by book entry, ensure the
integrity of securities issues, and
minimize and manage the risks
associated with the safekeeping and
transfer of securities; (ii), inter alia,
prevent the unauthorized creation or
deletion of securities; and (iii) Protect
assets against custody risk through
appropriate rules and procedures
consistent with relevant laws, rules, and
regulations in jurisdictions where it
operates.
DTC believes the proposed rule
change is consistent with the provisions
of Rule 17Ad–22(e)(11)(i), cited above,
57 17
58 17
PO 00000
CFR 240.1717Ad–22(d)(10).
CFR 240.1717Ad–22(d)(11)(i)(ii) and (iii).
Frm 00079
Fmt 4703
Sfmt 4703
because (i) by providing for the Deposit
of Securities in the name of Cede & Co.
to be deposited in electronic form and
stored in an electronic vault, the
proposed rule change would provide for
the immobilization and
dematerialization of master certificates
for the transfer of CDs by book entry, (ii)
the integrity of E–CDs would be
maintained by such storage in the
secure electronic vault and (iii) it would
minimize the risks associated with the
safekeeping and transfer of securities by
providing for purely electronic
processing of the certificates and
therefore preventing potential of loss of
certificates if the applicable issues were
to be issued and processed in physical
form.
DTC believes the proposed rule
change is consistent with the provisions
of Rule 17Ad–22(e)(11)(ii), cited above,
because it would provide for a process
allowing the issuance and Deposit of the
related Securities through the use of
UWC and associated System Templates
for creation of E–CDs, signature of E–
CDs and Delivery of the E–CDs to DTC
for storage in the E-Vault. Through the
use of this centralized process for
issuance and processing of CDs, the
proposed rule change would facilitate
the prevention of the unauthorized
creation or deletion of securities
processed through the E–CD program.
DTC believes the proposed rule
change is consistent with the provisions
of Rule 17Ad–22(e)(11)(iii) because, as
discussed above, it would provide for
Procedures for the issuance of E–CDs,
Deposit of E–CDs, and custody of E–CDs
in the E-Vault in a manner consistent
with the requirements applicable to the
validity of electronic negotiable
instruments under the NYUCC and the
e-signature laws, as discussed above.
The applicable Procedures would be
established through proposed rule
changes to the Underwriting Service
Guide and the OA, and the utilization
of Electronic Master Certificates in the
forms of System E–CD Templates issued
under the applicable E–CD BLOR, as
discussed above. Therefore, DTC
believes that E–CDs issued, Deposited
and stored in accordance with the
proposed rule change would be
Financial Assets that constitute Eligible
Securities under the Rules, and would
be valid and binding negotiable
instruments under applicable law, and
therefore protect the applicable assets
against custody risk through appropriate
rules and procedures consistent with
relevant laws, rules, and regulations in
jurisdictions where DTC operates.
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(B) Clearing Agency’s Statement on
Burden on Competition
Once the proposed rule change is
fully implemented as described above,
DTC does not believe that the proposed
rule change would have any impact, or
impose any burden, on competition
because the proposed rule change
provides for an additional method
under which Participants may request
eligibility of, process, and Deliver CDs
on a voluntary basis. The new method
would be available to all Participants
through UWC, on a date to be
announced by Important Notice.
The existing method for Deposit of
CDs at DTC, that includes the use of a
physical master certificate, would
continue to remain available to all
Participants even after the new E–CD
process was implemented.
DTC does not believe that the aspect
of the proposed rule change to initially
make the proposed E–CD process
available to a subset of Participants
prior to full implementation, as
described above, would have any
impact, or impose any burden on
competition. Participants not
participating in the initial phase
described above would be able to
continue to Deposit eligible CDs in
physical form. However, to the extent
the proposed rule change could cause a
burden because certain Participants
would continue to be able to Deliver
electronic certificates during an
interruption of Participants’ ability to
make physical delivery of securities to
DTC, and/or DTC’s ability to accept
physical deliveries of securities, DTC
does not believe the burden have a
significant impact on competition
because Participants could utilize the
LOP process, mentioned above, to effect
Delivery of a security represented in
physical form to DTC despite any such
interruption of physical delivery
services.
DTC does not believe that the
proposed rule change to make technical
changes with respect to spelling,
punctuation and spacing of text within
the Procedures, as described above,
would have any impact, or impose any
burden, on competition because the
technical changes would merely provide
enhanced clarity with respect to the
Procedures and not have an effect on the
rights or obligations of Participants and/
or Issuers with respect to eligibility
processing and Deposit of Eligible
Securities at DTC.
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18:18 Dec 03, 2020
Jkt 253001
(C) Clearing Agency’s Statement on
Comments on the Proposed Rule
Change Received From Members,
Participants, or Others
DTC has not solicited or received any
written comments relating to this
proposal. DTC will notify the
Commission of any written comments
received by the DTC.
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–2020–017 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–2020–017. 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 website (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
PO 00000
Frm 00080
Fmt 4703
Sfmt 4703
78381
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website 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 website
(https://dtcc.com/legal/sec-rulefilings.aspx). All comments received
will be posted without change. Persons
submitting comments are cautioned that
we do not redact or edit personal
identifying information from comment
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–DTC–
2020–017 and should be submitted on
or before December 28, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.59
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–26676 Filed 12–3–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–90536; File No. SR–CBOE–
2020–106]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing of a
Proposed Rule Change, as Modified by
Amendment No. 1, To Amend Its Rules
Regarding the Minimum Increments for
Electronic Bids and Offers and
Exercise Prices of Certain FLEX
Options and Clarify in the Rules How
the System Ranks FLEX Option Bids
and Offers for Allocation Purposes
November 30, 2020.
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 November
16, Cboe Exchange, Inc. (‘‘Exchange’’ or
‘‘Cboe Options’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change, and on November 30, 2020, the
Exchange filed Amendment No. 1 to the
proposed rule change, which amended
and replaced the proposed rule change
in its entirety. The proposed rule
change, as modified by Amendment No.
1, as described in Items I, II, and III
59 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
E:\FR\FM\04DEN1.SGM
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]]>Agencies
[Federal Register Volume 85, Number 234 (Friday, December 4, 2020)]
[Notices]
[Pages 78371-78381]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-26676]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-90534; File No. SR-DTC-2020-017]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing of Proposed Rule Change to Allow for the Deposit of
Electronic Certificates of Deposit and Technical Changes
November 30, 2020.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
[[Page 78372]]
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on November 20, 2020, 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 the clearing agency. 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.
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change \3\ consists of amendments to the
Procedures \4\ of DTC. Specifically, the proposed rule change would
amend the OA and Underwriting Service Guide to implement a new
application and secured electronic vault (``E-vault'') for requests for
eligibility, execution, Delivery and storage of certificates of deposit
(``CDs'') that are issued by state and federal chartered banks that are
Eligible Securities \5\ in electronic form. Technical changes with
respect to spelling, punctuation and spacing of text would also be
made. The use of the new application and E-vault would replace an
existing legacy platform and paper-based model for Delivery and storage
of CDs maintained in DTC's secured physical vault, as more fully
described below.
---------------------------------------------------------------------------
\3\ Capitalized terms not defined herein are defined in the
Rules, By-Laws and Organization Certificate of DTC (the ``Rules''),
available at www.dtcc.com/~/media/Files/Downloads/legal/rules/
dtc_rules.pdf, the DTC Operational Arrangements (Necessary for
Securities to Become and Remain Eligible for DTC Services) (``OA''),
available at https://www.dtcc.com/~/media/Files/Downloads/legal/
issue-eligibility/eligibility/operational-arrangements.pdf, and the
DTC Underwriting Service Guide (``Underwriting Service Guide''),
available at https://www.dtcc.com/~/media/Files/Downloads/legal/
service-guides/Underwriting-Service-Guide.pdf.
\4\ The OA and the Underwriting Service Guide constitute
Procedures of DTC. Pursuant to the Rules, the term ``Procedures''
means the Procedures, service guides, and regulations of DTC adopted
pursuant to Rule 27, as amended from time to time. See Rule 1,
Section 1, supra note 3. DTC's Procedures are filed with the
Commission. They are binding on DTC and each Participant in the same
manner as they are bound by the Rules. See Rule 27, supra note 3.
The OA is also binding on each issuer and agent of an Eligible
Security. See OA, supra note 3 at 5, supra note 3. DTC also
maintains service guides that constitute Procedures relating to
services it offers. Available at https://www.dtcc.com/legal/rules-and-procedures?subsidiary=DTC&pgs=1.
\5\ Generally, Eligible Securities must have been issued in a
transaction (i) registered with the Commission pursuant to the
Securities Act; (ii) exempt from registration pursuant to a
Securities Act exemption without transfer or ownership restrictions;
or (iii) pursuant to Rule 144A, 17 CFR 230.144A, or Regulation S, 17
CFR 230.901-230.905, under the Securities Act. See OA, supra note 3
at 2-3.
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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 proposed rule change of DTC would amend the Procedures of DTC.
Specifically, the proposed rule change would amend the OA and
Underwriting Service Guide to implement a new application and secured
E-vault for requests for eligibility, execution, Delivery and storage
of CDs that are (i) Eligible Securities and (ii) issued by state and
federal chartered banks in electronic form. The use of the new
application and E-vault would replace an existing legacy platform for
Delivery and storage of CDs maintained in DTC's secured physical vault,
as more fully described below.
Background
DTC (i) makes eligible for Deposit, processes and holds physical
retail CDs issued by various U.S. banks and Deposited by Participants
and (ii) credits interests in those CDs to Participant's Securities
Accounts.\6\ As described below, the use of physical certificates
presents operational concerns to Participants and to DTC and DTC has
undertaken efforts to promote dematerialization of Securities. To
address operational concerns relating to processing of physical CDs,
DTC has developed a system that would eliminate the need for physical
certificates for certain issue types of CDs by allowing them to be
issued and held in electronic form, as described below.
---------------------------------------------------------------------------
\6\ See OA, supra note 3, at 9-10.
---------------------------------------------------------------------------
Upon implementation, the proposed rule change would address
operational concerns of Participants relating to the amount of time and
manual effort currently required for the issuance and redemption of
physical CDs by allowing for a fully electronic process for the
execution and Delivery of the affected CD certificates. As such, the
proposed rule change would also reduce the need for DTC to (i) perform
manual processing relating to CD Deposits and (ii) reserve space in its
secure physical vault currently used for CDs by allowing for the
storage of CDs in electronic form in a secure E-vault.
The proposed electronic process would also address concerns
relating to potential disruptions in the physical transport of paper
CDs to DTC currently made using courier and overnight delivery
services. Such disruptions may be caused by weather-related issues,
such as Superstorm Sandy which impacted physical securities processing
in 2012, and other previously unforeseen circumstances, such as the
COVID-19 pandemic. Although, DTC has been able to maintain securities
eligibility and processing operations during such circumstances,
including by utilizing a letter of securities possession \7\ (``LOP'')
process that enables DTC to accept Delivery of securities represented
in physical form even if the circumstances prevent physical delivery at
that time, such disruptions could delay the Deposit of CDs and impact
the timely closing of issuances and otherwise affect liquidity in the
marketplace for CDs.
---------------------------------------------------------------------------
\7\ See Underwriting Service Guide, supra note 3 at 17.
---------------------------------------------------------------------------
Current DTC Eligibility Process for CDs
Only Participants can request that DTC make a Security eligible for
Deposit.\8\ It is therefore incumbent on an issuer to have a
relationship with an underwriter or other financial institution that is
a Participant, or is directly associated with a Participant, that is
willing to sponsor the eligibility process for the issuer's
Securities.\9\ A Participant may submit a Deposit eligibility request
for a CD through the underwriting services of DTC at the time a
security is initially being offered and distributed to the marketplace
or at a later time for already issued and outstanding securities.\10\
---------------------------------------------------------------------------
\8\ See id. at 1.
\9\ Id.
\10\ Id.
---------------------------------------------------------------------------
Participants must provide an eligibility request for the specified
securities to Underwriting by submitting all required issuer and
securities data and all related offering documents, at a minimum,
through the online Securities Origination, Underwriting and Reliable
Corporate Action Environment (``UW SOURCE'') system.\11\
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\11\ Id. at 2.
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CDs are book entry-only (``BEO'') Securities \12\ registered to
DTC's
[[Page 78373]]
nominee, Cede & Co. BEO Securities are DTC-eligible Securities for
which (i) physical certificates are not available to investors and (ii)
DTC, through its nominee, Cede & Co., will hold the entire balance of
the offering, either at DTC (in physical form) or through a FAST Agent
in DTC's Fast Automated Securities Transfer (``FAST'') program. Issuers
of BEO Securities must submit to DTC a Letter of Representations
(``LOR'') among the issuer, its agent (as applicable) and DTC, prior to
such issue being determined to be eligible. For corporate and municipal
securities, there are two acceptable forms of LOR: A Blanket Issuer
Letter of Representations (``BLOR'') or an Issuer Letter of
Representations (``ILOR''). A BLOR is issuer specific and applicable to
all DTC-eligible securities (debt and/or equity) of the same issuer.
Once a BLOR is on file for an issuer, a new BLOR is not required for
future issuances unless the issuer's name changes (in which case an
opinion of counsel may also be required). An ILOR may be used for
discrete issuances, and is applicable only to that issue of securities,
such as trust issuances. Each issuer of a BEO Security must submit to
DTC a fully executed LOR on DTC's preprinted form. This LOR represents
the issuer's agreement to comply with the requirements set forth in the
OA, as amended from time to time.\13\
---------------------------------------------------------------------------
\12\ Id. at 4.
\13\ Id.
---------------------------------------------------------------------------
Once DTC has determined to make a Security eligible, a Participant
may Deposit the Security at DTC for crediting to its Securities
Account. For a CD issuance, the issuing bank and Depositing Participant
must coordinate the execution and Delivery of the physical certificate
to DTC in order for the Participant to timely receive credit by the
anticipated closing date.\14\ Once DTC receives an acceptable Deposit
of an eligible CD from a Participant, DTC credits a Security
Entitlement \15\ in the CD to the Participant's Securities Account \16\
and DTC holds the original paper certificate in its secure vault for
the duration of the term of the CD.
---------------------------------------------------------------------------
\14\ See DTC Deposits Service Guide (``Deposits Guide''),
available at https://www.dtcc.com/~/media/Files/Downloads/legal/
service-guides/Deposits.pdf, at 8. The closing date is the date on
which Underwriting will distribute an issue to the underwriter's
Participant account at DTC for book-entry delivery and settlement
upon notification by both the underwriter and the issuer that an
issue has closed (i.e., the distribution date). See Underwriting
Guide, supra note 3, at 6. On the closing date, when an issuer or
its agent and the underwriter confirm with DTC that the issue has
closed and verifies pertinent data, DTC releases the position from
an internal DTC account and credits the underwriter's Participant
account, provided that DTC received the certificates. See id. at 9.
\15\ Pursuant to Rule 1, the term ``Security Entitlement'' has
the meaning given to the term ``security entitlement'' in Section 8-
102 of the New York Uniform Commercial Code (``NYUCC''). See Rule 1,
supra note 3. See also NYUCC 8-102. The interest of a Participant or
Pledgee in a Security credited to its Account is a Security
Entitlement. See Rule 1, supra note 3.
\16\ See Deposits Guide, supra note 14, at 8.
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Proposal
Pursuant to the proposed rule change, DTC is proposing to launch a
new program to support Deposit of electronic CDs that would be issued
by banks (``E-CDs''). The program would allow E-CDs to be
electronically generated, signed, delivered to DTC and held in
electronic form in a secure E-vault.
Upon implementation of the proposed rule change, CDs of state and
federally chartered banks containing certain standard terms that
conform to one of four proposed templates (``System E-CD Templates'')
would be eligible for the new program, as described below. The System
E-CD Templates were developed with input from DTC Participants that act
as underwriters of CD. The templates would cover four basic types of
CDs, specifically (i) Fixed Rate Non-Callable, (ii) Fixed Rate
Callable, (iii) Step Rate Non-Callable and (iv) Step Rate Callable.\17\
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\17\ A Fixed Rate CD pays a fixed interest rate over the entire
term of the CD. A Step Rate CD allows for increases in the interest
rate at specific, intervals that are pre-defined by the issuer. A
Callable CD contains a call feature that gives the issuing bank the
ability to redeem the CD prior to its stated maturity, usually
within a given time frame and at a preset call price as set forth in
the ``call provision'' in the master certificate. A certificate
without such a provision cannot not be called by the issuer prior to
maturity date (Non-Callable).
---------------------------------------------------------------------------
After implementation, in order to facilitate needs of issuers and
underwriters, DTC may, at its own discretion, (i) edit the System E-CD
Templates and/or (ii) add additional templates for use in the E-CD
program as published via Important Notice that would also be deemed
System E-CD Templates. Any edits to the System E-CD Templates would not
affect E-CDs that were previously issued into DTC.
More complex CDs that do not conform to the System E-CD Templates,
including those referred to as structured CDs, would be excluded from
the proposed new process, because they typically contain terms that are
not amenable to the creation of fixed templates in the format proposed
herein.
Upon implementation, Participants would request eligibility for E-
CDs that conform to the System E-CD Templates through a new system
referred to as Underwriting Central (``UWC''). UW SOURCE would continue
to remain available for other types of issuances, including the
issuances of CDs in physical form.
In order to request eligibility of a CD to be issued in electronic
form, the Underwriter would provide all required information relating
to the CD through UWC, including but not limited to offering
documentation and the terms to be populated in the electronic
certificate. The relevant data (e.g., interest rate(s) and maturity
date) will be populated into the templates as entered by the
underwriter into the UWC application. It would be the responsibility of
the Underwriter to disseminate the electronic master certificate to the
issuer for electronic signature via UWC. The issuer would be required
to electronically sign and Deliver the master certificate to DTC prior
to closing.
For CDs that do not conform to the System E-CD Templates,
eligibility request would continue to be entered by the Underwriter
through UW SOURCE and a physical certificate delivered to DTC prior to
closing.
Whether issued in electronic or physical form, securities should be
delivered to DTC by no later than noon Eastern Time on the business day
prior to the Closing Date as currently specified in Exhibit B of the
OA.
In addition, each issuer that opts to issue E-CDs would be required
to provide a new BLOR designed for use with the E-CD program, as
described below.
Legal Framework Supporting Issuance of Electronic CDs
The following discussion is provided by DTC and includes its own
analysis of applicable state law provisions that DTC believes supports
the validity of the issuance and Deposit of E-CDs at DTC pursuant to
the proposed rule change. Based on its analysis, DTC believes that the
proposed rule change would allow E-CDs to be electronically generated,
signed, Delivered to DTC and held in electronic form in a secure E-
vault within a legal framework that supports the validity of E-CDs in a
manner comparable to that of physical issuance and Deposit of CDs that
are eligible for DTC services pursuant to the Rules and Procedures.
This analysis is not part of the proposed rule, but a separate,
analysis of applicable law. DTC emphasizes that neither the following,
nor any aspect of the proposed rule change, is intended by DTC to be
legal advice by DTC to any Participant, issuer or other third party,
and should not be considered to be legal advice by DTC to any
Participant, issuer, or other third party.
[[Page 78374]]
DTC's Rules are Governed by the Law of New York
DTC's activities and its Rules are structured in accordance with
the laws of New York and the United States, and provide that they shall
be governed by, and construed in accordance with, the law of New
York.\18\ A principal law comprising the legal framework under which
DTC operates includes, but is not limited to, the NYUCC, which among
other things, supports a legal framework for the issuance of Securities
and the indirect holding system, under which DTC credits in Securities
to its Participants.
---------------------------------------------------------------------------
\18\ See Rule 2, supra note 3.
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NYUCC and Electronic Signature Laws; and Impact Regarding E-CDs
CDs are ``negotiable instruments'' under Article 3 of the Uniform
Commercial Code (the ``UCC''),\19\ which has been adopted in New York
under the NYUCC,\20\ and, depending on how they are structured, may
also be ``securities'' and/or ``financial assets,'' as defined in
Article 8 of the UCC, which has been adopted in New York under the
NYUCC.\21\ In addition, because the CDs are held in DTC through the
indirect holding system, the rights and duties of DTC, as a securities
intermediary, and its Participants, as entitlement holders, are
governed by Part 5 of Article 8 of the UCC,\22\ also adopted in New
York under the NYUCC. In this regard, the rights and obligations
associated with CDs held at DTC are governed by the relevant provisions
of the NYUCC.
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\19\ Unless otherwise specified, citations in this proposed rule
change to provisions of the UCC are to the UCC as adopted in New
York under the NYUCC.
\20\ See NYUCC 3-102 and 3-104 (defining CDs as negotiable
instruments).
\21\ See NYUCC 8-102 (for NYUCC definitions of ``financial
asset'' and ``security'').
\22\ See NYUCC 8-501-8-508.
---------------------------------------------------------------------------
Section 8-110 of the UCC provides that only the law of the issuer's
jurisdiction will govern the ``validity'' of a ``security''--the laws
of another jurisdiction cannot be selected to govern validity issues.
The term ``validity'' is not defined in the UCC. DTC believes that laws
governing the creation and existence of an electronic record as a
substitute for a written instrument may be viewed as laws that govern
the ``validity'' of an instrument.\23\
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\23\ See Comment 2 to Section 8-110 of the UCC (explaining that
the law of the issuer's jurisdiction governs the validity of a
security in order to ensure that a single body of law governs the
questions addressed in Part 2 of Article 8). Part 2 of Article 8 of
the UCC describes the circumstances in which an issuer can and
cannot assert invalidity as a defense against purchasers, including
lack of genuineness, unauthorized signatures and incomplete
certificates. This implies that the term ``validity'' in Section 8-
110 of the UCC refers to a broader set of issues than just the
validity of issuance of the security under the issuer's governing
documents and local law.
---------------------------------------------------------------------------
An E-CD that is both a negotiable instrument and a security, will
be governed as to its validity by the law of the issuer's jurisdiction,
by virtue of Section 8-110 of the UCC. If the validity of a security is
determined to include its electronic nature, then the electronic
signature and record laws of each individual issuer's jurisdiction
would apply to each E-CD. Therefore, requiring an E-CD to be a security
could adversely impact the valid issuance of the E-CD if the laws of
the issuer's jurisdiction do not contemplate the electronic signature
of a security.
However, as discussed below, Article 3 negotiable instruments allow
for a choice of law. In this regard, DTC believes that requiring E-CDs
to be issued as negotiable instruments would facilitate the valid
issuance of E-CDs regardless of an issuer's jurisdiction, so long as
the law of a jurisdiction that contemplates the use of electronic
signatures as part of a valid issuance is chosen to govern the E-CD.
As more fully described in the discussion of electronic signature
laws provided by DTC below, DTC proposes to apply New York law for this
purpose, but also proposes to design the E-CD program such that E-CDs
issued into DTC would be valid under the laws of all states that allow
the use of electronic records and signatures in any transaction that
would otherwise require a paper document and/or wet-ink signature.
Discussion of Electronic Signature Laws
The New York Electronic Signatures and Records Act
The New York Electronic Signatures and Records Act \24\ (``ESRA'')
governs the validity of electronic records and signatures in New York.
ESRA is like UETA in that it accords the same power and effect to
electronic records and signatures as would otherwise be accorded to
writings under New York law.
---------------------------------------------------------------------------
\24\ N.Y. State Tech. Law Sec. 30[] (McKinney 2012).
---------------------------------------------------------------------------
ESRA does not apply to negotiable instruments, such as CDs, unless
an electronic record of such instrument is created, stored or
transferred in a manner that meets the Uniqueness Standard. If the
Uniqueness Standard is met, then CDs that are issued, created and
signed electronically have the same power and effect as paper CDs under
New York law.
The Uniform Electronic Transactions Act
The Uniform Electronic Transactions Act \25\ (``UETA''), has been
adopted in various forms by 47 U.S. states.\26\ UETA generally allows
parties to agree to use electronic records and signatures in any
transaction that would have otherwise required a paper document and/or
wet-ink signature.
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\25\ Unif. Electronic Transactions Act (Unif. L. Comm'n 1999).
\26\ Illinois, New York and Washington have not adopted UETA.
Although it has adopted UETA, California has not adopted Section 16
of UETA, which, as described in further detail below, is the section
of UETA that provides for the electronic creation, signature and
storage of negotiable instruments such as CDs.
---------------------------------------------------------------------------
Section 16 of UETA \27\ provides legal support for the creation,
transferability and enforceability, of, among other things, negotiable
instruments such as CDs, if they meet the following standards:
---------------------------------------------------------------------------
\27\ Unif. Elec. Transactions Act Sec. 16 (Unif. L. Comm'n
1999).
---------------------------------------------------------------------------
The E-CD must be a ``transferable record,'' which is
defined, in part, as an electronic record that would be a note under
Article 3 of the UCC (CDs are notes in all relevant UETA
jurisdictions), and the issuer has expressly agreed that it is a
transferable record.
The E-CD must initially be created as an electronic
record, and not as a paper document that is converted to one.\28\
---------------------------------------------------------------------------
\28\ See Comment 2 to Section 16 of UETA (explaining that
Section 16 is not intended to cover the conversion of a paper note
to an electronic record; instead, transferable records must be
electronic at the time they are created).
---------------------------------------------------------------------------
Each E-CD must be stored in a system that meets the
following standards (the ``Section 16 Safe Harbor''):
[cir] The E-CD is created, stored and assigned in a manner that a
single authoritative copy of the transferable record exists which is
unique, identifiable and, subject to certain exceptions, unalterable
(the ``Uniqueness Standard'').
[cir] The authoritative copy must (i) identify the person claiming
control (i.e., the person to which the transferable record was issued
or transferred), (ii) be maintained by the person claiming control or
its designee and (iii) be unalterable except with the permission of the
person claiming control.
[cir] Copies of and authorized revisions to the authoritative copy
must be clearly marked as such.
DTC believes that any E-CD that is a transferable record and is
stored in a system that falls within the Section 16
[[Page 78375]]
Safe Harbor will have the same rights and obligations of an equivalent
writing under the UCC.\29\
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\29\ Because Section 16 of UETA only contemplates a transferable
record that has been electronic since its creation and requires that
the transferable record comply with the Section 16 Safe Harbor,
including the Uniqueness Standard, at all times, DTC believes that
the legal issues relating to the electronic signature of a
negotiable instrument such as a CD are necessarily intertwined with
its electronic creation and storage. Thus, an electronic negotiable
instrument cannot be created outside of an appropriate system that
complies with the Section 16 Safe Harbor even if electronically
signed.
---------------------------------------------------------------------------
Because the Section 16 UETA provisions are more robust than ESRA
and the guidance in Section 16 of UETA is more developed, the E-CDs
that would be made eligible by DTC would be structured to meet the
requirements of UETA, including the Section 16 Safe Harbor, even
though, as discussed below, the E-CDs will also be structured so that
they are governed by New York law (including ESRA).\30\ This construct
will help ensure that an E-CD also will remain valid in the
jurisdictions that have adopted Section 16 of UETA, in the unlikely
event that a court of competent jurisdiction would determine not to
recognize the selection of New York law.
---------------------------------------------------------------------------
\30\ Although Section 307 of ESRA does not provide the same
robust provisions and commentary as Section 16 of UETA, it is still
sufficiently clear that E-CDs that meet the Uniqueness Standard are
valid.
---------------------------------------------------------------------------
E-Sign
The federal Electronic Signatures in Global and National Commerce
Act \31\ (``E-Sign'') generally provides for the legal effect, validity
and enforceability of electronic signatures and records relating to
transactions in interstate or foreign commerce and preempts state law
with respect to such transactions except to the extent the state has
enacted UETA or other alternative procedures or requirements that are
consistent with E-Sign. E-Sign generally tracks the provisions of UETA
but does not apply to transactions that are governed by the UCC, such
as the issuance of CDs. E-Sign's equivalent of Section 16 of UETA
expressly limits the use of transferable records to debt obligations
secured by an interest in real property (i.e., mortgage notes).
Instead, state law must provide for the electronic creation and
signature of a CD for it to be valid.
---------------------------------------------------------------------------
\31\ Electronic Signatures in Global and National Commerce 15
U.S.C. Sec. 70[].
---------------------------------------------------------------------------
Others
In addition to New York, Illinois and Washington also did not adopt
UETA. Illinois adopted an electronic records and signatures law that is
similar to UETA and contains a section that is analogous to Section 16
of UETA. Washington adopted an electronic records and signatures law
that is very different than UETA and does not clearly contemplate or
provide for the issuance of electronic negotiable instruments such as
CDs. As noted above, California has not adopted Section 16 of UETA.
Therefore DTC is unable to conclude whether CDs that are created,
signed and stored electronically would be valid under Washington or
California law because it has not identified a legal framework under
those laws whereby an issuer could issue a valid E-CD that could in
turn be Deposited at DTC in accordance with the proposed rule change.
Proposed Rule Changes
Pursuant to the proposed rule change, DTC would amend the OA and
Underwriting Service Guide, and create a new BLOR and the System E-CD
Templates to be used exclusively for the issuance of E-CDs, in order to
implement the proposed UWC system and E-vault for the issuance Delivery
and Deposit of E-CDs and put in place the Procedures and a framework
that conforms to the legal requirements for the maintenance of valid E-
CDs, as described above.
Each Issuer that Opts to Participate in the E-CD Program Would Sign a
New BLOR.
Pursuant to the proposed rule change, the OA would require each E-
CD issuer to submit a new BLOR (``E-CD BLOR'') to DTC through UWC prior
to its first issuance of E-CDs. In order to minimize the additional
provisions in the Electronic Master Certificate (as defined below), the
E-CD BLOR would contain supplemental terms related to the E-CD program
(in addition to the representations that are currently included in a
BLOR). The new E-CD BLOR would provide that all E-CDs issued in
connection therewith and under one of the base CUSIP numbers set forth
on the face of the E-CD BLOR would be part of the same transaction in
which the E-CD BLOR was executed.\32\
---------------------------------------------------------------------------
\32\ Section 3-119 of the NYUCC provides that a negotiable
instrument may be ``modified or affected by any other written
agreement executed as part of the same transaction.''
---------------------------------------------------------------------------
Pursuant to Section 3-119 of the UCC, a holder in due course of a
negotiable instrument must have notice of any separate agreement in
order to be subject to its limitations. Therefore, the Electronic
Master Certificate (as defined below) would contain a reference to the
new E-CD BLOR.\33\
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\33\ While a CD cannot expressly be made subject to the terms of
an additional agreement, Section 3-105(1)(c) of the UCC permits the
CD to refer to or state that it arises out of a separate agreement.
---------------------------------------------------------------------------
Each Issuer Issuing E-CDs Would Electronically Sign and Issue an
Electronic Master Certificate.
E-CDs would be issued on a new form of master electronic
certificate (``Electronic Master Certificate'') that has been specially
created for the E-CD program. A separate electronic Master Certificate
would be issued by the issuer for each broker that participates in an
E-CD offering. Because E-CDs must necessarily be created, signed and
thereafter maintained in electronic form using a system that complies
with the Section 16 Safe Harbor, including the Uniqueness Standard, DTC
would only make eligible E-CDs that have been initiated by the related
broker/dealer through UWC, then created, signed and submitted to DTC
through an electronic signature system designed by DTC for this
purpose. UWC would allow Participants to initiate a new E-CD issuance
by creating a draft Electronic Master Certificate using the applicable
System E-CD Template that would be sent to an issuer for verification
and signature. The issuer will verify and affix its electronic
signature to the Electronic Master Certificate created by the
Participant in a manner that creates an executed Electronic Master
Certificate that complies with the Uniqueness Standard.
Once Issued, Each Original Electronic Master Certificate Would be
Automatically Stored in an Electronic Vault Repository.
Once an issuer verifies and affixes its electronic signature to an
Electronic Master Certificate, the Electronic Master Certificate would
be automatically stored in an E-vault repository that complies with the
Section 16 Safe Harbor, and the Electronic Master Certificate would
immediately be deemed ``Delivered'' to DTC. The E-vault will identify
Cede & Co. as the person to which the Electronic Master Certificate was
issued. The E-vault will maintain an audit trail that will track all
events that occur with respect to the Electronic Master Certificate,
including any authorized changes, such as notations to reflect
withdrawals, which will be noted in the audit trail instead of on the
body of the Electronic Master Certificate. The audit trail will be
incorporated as part of the Electronic
[[Page 78376]]
Master Certificate in accordance with the BLOR.
E-CDs Would be Governed by New York Law.
The parties would select New York law as the governing law for all
E-CDs, as described below. Because there are variations between the
electronic record and signature laws (including in the provisions of
UETA, as adopted) across the various U.S. jurisdictions, the selection
of New York law (including ESRA) as the law governing the E-CDs would
allow DTC to structure a single E-CD program that will be valid for
issuers in all U.S. jurisdictions.
DTC believes that the System E-CD Templates for the E-CDs and the
proposed BLOR to be used for E-CD issuances have been structured in a
manner that complies with the applicable rules governing jurisdiction
selection, as follows:
Each BLOR would provide that the laws of New York would
govern the terms of the E-CD, which is issued and payable to DTC in New
York. The jurisdiction selection rule in Section 1-301 of the UCC,
which applies to CD issuances under Article 3 of the UCC, allows
parties to a transaction that bears a reasonable relation to a state to
select the laws of that state to govern their rights and duties.
Each Electronic Master Certificate would have a minimum
denomination of $250,000. The jurisdiction selection rule in Section 5-
1401 of the New York General Obligations Law allows parties to any
transaction that results in an obligation of at least $250,000 to
select New York law to govern their rights and obligations.
Each Electronic Master Certificate would expressly provide
that it is payable in New York. The general rule in New York (and in
most other jurisdictions) is that a note (such as a CD) that is
executed in one state and payable in another, is governed as to its
nature, validity, interpretation and effect by the laws of the state
where it is made payable.
E-CDs Would be Structured as ``financial assets''--but not as
``Securities''--Under Article 8 of the UCC.
Section 8-110 of the UCC provides that only the law of the issuer's
jurisdiction will govern the ``validity'' of a ``security''--the laws
of another jurisdiction cannot be selected to govern validity issues.
The term ``validity'' is not defined in the UCC. DTC believes that laws
governing the creation and existence of an electronic record as a
substitute for a written instrument may be viewed as laws that govern
the ``validity'' of an instrument.\34\
---------------------------------------------------------------------------
\34\ See Comment 2 to Section 8-110 of the UCC (explaining that
the law of the issuer's jurisdiction governs the validity of a
security in order to ensure that a single body of law governs the
questions addressed in Part 2 of Article 8). Part 2 of Article 8 of
the UCC describes the circumstances in which an issuer can and
cannot assert invalidity as a defense against purchasers, including
lack of genuineness, unauthorized signatures and incomplete
certificates. This implies that the term ``validity'' in Section 8-
110 of the UCC refers to a broader set of issues than just the
validity of issuance of the security under the issuer's governing
documents and local law.
---------------------------------------------------------------------------
CDs may be both ``negotiable instruments'' under Article 3 of the
UCC and ``securities'' under Article 8 of the UCC, in which case the
provisions of Article 8 will govern the CD.\35\ This means that an E-CD
that is both a negotiable instrument and a security, will be governed
as to its validity by the law of the issuer's jurisdiction, by virtue
of Section 8-110 of the UCC. If the validity of a security is
determined to include its electronic nature, then the electronic
signature and record laws of each individual issuer's jurisdiction
would apply to each E-CD, and the selection of New York's ESRA would
not be valid. As a result, any jurisdiction that has not enacted a law
that clearly provides for electronic negotiable records would
necessarily have to be excluded from the E-CD program.\36\
---------------------------------------------------------------------------
\35\ See Section 3-103(1) of the UCC (providing that Article 3
does not apply to investment securities); Comment 2 to Section 3-103
of the UCC (explaining that if an instrument is negotiable in form
under Article 3, but is, because of its manner of use, a
``security'' under Article 8, Article 8 and not Article 3 applies);
and Section 8-103(d) of the UCC and Comment 5 to Section 8-103 of
the UCC (providing that a writing that is a security certificate is
governed by Article 8, even though it also meets the requirements of
Article 3).
\36\ In particular, as noted above, if the E-CDs are Article 8
securities, then DTC would be unable to conclude that E-CDs would be
valid under the laws of California and Washington, and issuers in
California and Washington would likely be excluded from the E-CD
program.
---------------------------------------------------------------------------
In order to ensure that the parties can properly choose New York
law, including ESRA, to govern the E-CDs, E-CDs would be structured so
that they are not Article 8 Securities. To do this, each Electronic
Master Certificate would provide that it can be transferred only by
delivery and indorsement. A ``security,'' as defined in Section 8-
102(a)(15) of the UCC, must be in ``bearer'' or ``registered'' form.
``Bearer form'' requires that the security be payable to bearer.
Because each Electronic Master Certificate would be payable to Cede &
Co., as nominee for DTC, it would not be in bearer form. ``Registered
form'' requires that transfers of a security be registered upon books
maintained for that purpose by or on behalf of the issuer, or the
security certificate must so state. Because E-CDs would be
transferrable only by delivery and indorsement and not on the books of
the issuer, they will not be in registered form and therefore will not
fall within the definition of ``security'' in Article 8 of the UCC.
Although the E-CDs would not be Article 8 securities, under Section
8-103(d) of the UCC they will still be ``financial assets'' if held in
a securities account.\37\ DTC Rule 6 provides, among other things, that
DTC will accept Securities for deposit and may offer such other
services as are consistent with its purposes and powers.\38\
``Securities'' are defined in the DTC Rules as anything that would be a
``financial asset'' under Section 8-102 of the UCC. The DTC Rules
further provide that any item credited to a securities account will be
deemed a Security under the DTC Rules and treated as a financial asset
under Article 8 of the UCC. Accordingly, E-CDs, each of which will be a
financial asset under Article 8 of the UCC, may be made eligible by
DTC, credited by DTC to the securities accounts of its participants,
and treated as a ``Security'' for all purposes, in each case under the
DTC Rules.
---------------------------------------------------------------------------
\37\ Section 8-103(d) of the UCC provides, in part, ``a
negotiable instrument governed by Article 3 is a financial asset if
it is held in a securities account.'' See also, the definition of
``financial asset'' in Section 8-102(a)(9) of the UCC, which
provides that any property held by a securities intermediary for
another person in a securities account will be a financial asset if
the securities intermediary has expressly agreed with the other
person that the property is to be treated as such.
\38\ DTC's corporate powers are listed in its Organization
Certificate, which include, among other things, the receipt on
deposit for safe-keeping money, securities, papers of any kind and
any other personal property for the account of its participants in
connection with DTC's acting as a clearing corporation.
---------------------------------------------------------------------------
The rules relating to the indirect holding system, security
entitlements and the rights and duties of securities intermediaries
(e.g., DTC) and entitlement holders, which are specified in Part 5 of
Article 8 of the UCC, apply to all financial assets.\39\ Thus, although
[[Page 78377]]
the E-CDs would not be securities, because they would be financial
assets, they may be issued and deposited with DTC, and DTC can credit
security entitlements therein to its Participants, as it currently does
with respect to paper CDs.\40\ E-CDs would be maintained as fungible
bulk by DTC, in accordance with the requirement in Section 8-504 of the
UCC that a securities intermediary maintain a financial asset in a
quantity corresponding to the aggregate of all security entitlements it
has established therein.\41\
---------------------------------------------------------------------------
\39\ See Comment 5 to Section 8-103 of the UCC (explaining that
the indirect holding rules apply to any Article 3 negotiable
instrument that is held through a securities intermediary; Comment 9
to Section 8-102 of the UCC (explaining that the indirect holding
rules in Part 5 of Article 8 may apply to financial assets even
where the rules in Parts 2, 3 and 4 of Article 8 do not apply); and
Comment 1 to Section 8-104 of the UCC (explaining that Article 3 and
not Article 8 specifies how one acquires a direct interest in a
bankers' acceptance, which is a negotiable instrument under Article
3 and a financial asset under Article 8, and Part 5 of Article 8
governs the rights of a clearing corporation's participants with
respect to a bankers' acceptance that is held by the clearing
corporation on account for its participants).
\40\ DTC currently accepts for deposit bankers' acceptances,
which are not Article 8 securities, and proposes to do the same with
respect to the E-CDs.
\41\ Comment 1 to Section 8-504 of the UCC explains that Section
8-504 recognizes the reality that these items are held as fungible
bulk and are not identified to a customer. The language in Section
8-504 of the UCC applies to all financial assets (not just
securities) and would therefore provide the basis for holding E-CDs
as fungible bulk, even if they are not Article 8 securities.
---------------------------------------------------------------------------
Summary of Selected E-CD Terms
Section 3-104 of the UCC provides that a negotiable instrument may
only contain an unconditional promise to pay a sum certain, a
prescribed set of other obligations and powers, and no other promise,
order, obligation or power. Because it is unclear exactly what would
constitute an additional obligation or power, only those provisions
that are necessary to ensure that a holder can ascertain all of the E-
CDs essential terms \42\ would be included in the Electronic Master
Certificate, either directly, or by reference to the issuer's E-CD
BLOR.
---------------------------------------------------------------------------
\42\ See Comment 8 to Section 3-105 of the UCC (``an instrument
is not negotiable unless the holder can ascertain all of its
essential terms from its face'').
---------------------------------------------------------------------------
Selected Terms Contained in the Master Electronic Certificate
The following terms would be included in each System E-CD Template:
The E-CD would be payable in New York--this ensures that
the E-CD will be governed by New York law.
The E-CD is issued in connection with a BLOR between the
issuer and DTC--this allows for the additional terms contained in the
BLOR to modify or affect the terms of the E-CD and puts any holder of
the E-CD on notice of the existence of such additional terms.
The E-CD is an electronic record created in accordance
with ESRA, and a transferable record under UETA--this makes clear the
issuer's intent that the E-CD be a valid electronic instrument under
both ESRA and UETA.\43\
---------------------------------------------------------------------------
\43\ Section 16 of UETA requires that the issuer expressly agree
that the E-CD is a transferable record. Comment 2 to Section 16 of
UETA explains that it is likely that this agreement will be set
forth in the body of the electronic record.
---------------------------------------------------------------------------
The E-CD would be stored in the E-vault--this is necessary
to understand how the notation and transfer provisions in the
Electronic Master Certificate will work.
The E-CD may be transferred only by delivery and
indorsement--this ensures that the E-CD would not be an Article 8
security and, therefore, not subject to the limitation on jurisdiction
selection with respect to validity.
Selected Terms Contained in the BLOR:
Paper out provision--this allows DTC to convert the E-CD
to a paper CD, if deemed necessary, without further action from the
issuer.
Selection of New York governing law and jurisdiction--
included in the BLOR to minimize additions to the Electronic Master
Certificate.
No contravention representation by the issuer--the issuer
is responsible for ensuring that the issuance of an E-CD complies with
applicable local law and regulation and the issuer's governing
documents.
Other Proposed Changes to the OA
In addition to the proposed changes described above, the OA would
be amended as follows:
a. Section I.A.1. would be amended to add a reference to UWC, in
addition to UW SOURCE, as a system that may be used by Participants to
submit eligibility requests. Additionally, the hyperlink to the website
of DTC's parent, The Depository Trust & Clearing Corporation (``DTCC'')
for information on UW SOURCE will be amended to refer to the
Underwriting section of DTCC's website. The proposed changes in this
section would facilitate Participants' ability to access DTC's systems
for eligibility requests.
b. Section 1.B.1 relating to the documentation requirements for BEO
Securities would be amended to add a new subsection c. with the
following text under a new heading titled ``Electronic Certificates for
Retail CDs'':
Issuers leveraging the use of electronic master certificates for
Retail CDs must submit to DTC on DTC's form, a fully executed BLOR and
its associated Rider, for each base CUSIP issuing Retail CDs through
the electronic process. For the current form of the E-CD BLOR please
refer to https://www.dtcc.com/legal/issue-eligibility.
In addition, subsection a. of this Section, which describes the
current Letter of Representation requirements for BEO Securities, would
be amended in order to clarify that the requirements described in that
subsection apply to BEO Securities other than E-CDs, namely FAST
securities or securities where a physical master certificate is
delivered to DTC.
The proposed changes to this section would facilitate Participants'
and issuers' access to documentation used in connection with
eligibility requests.
c. Section 1.C.1., which relates to considerations relating to
eligibility of CDs, would be amended to add a subsection c. that would
be titled ``Electronic Master Certificates,'' to provide for issuance
and Delivery of E-CDs and a legal disclaimer as follows:
In lieu of issuing and delivering physical master certificates to
DTC, the Underwriter can facilitate issuance of Retail CDs for state
and federally chartered banks in electronic form by using specific
master certificate templates (``System E-CD Templates'') provided by
DTC through UWC.
The relevant data (e.g., maturity date) will be populated into a
System E-CD Template as entered by the Underwriter into the UWC
application. It is the responsibility of the Underwriter to disseminate
the populated electronic master certificate to the Issuer for
electronic signature via UWC. The Issuer must electronically sign the
electronic master certificate prior to closing.
Each electronic master certificate is stored in a secure electronic
vault maintained by DTC.
For Retail CDs that do not conform to the System E-CD Templates, a
physical master certificate must be delivered to DTC prior to closing.
Note: Whether issued in electronic or physical form, securities
should be delivered to DTC by no later than noon ET on the business
day prior to the Closing Date as outlined in Exhibit B.
IMPORTANT LEGAL NOTICE:
DTC DOES NOT VALIDATE, CERTIFY, REPRESENT OR SEEK TO CONFIRM (i)
THE VALIDITY OF THE DATA ELEMENTS ENTERED BY A PARTICIPANT, ITS
CORRESPONDENT UNDERWRITERS AND OR VENDORS INTO UWC (TOGETHER WITH ANY
OTHER PERSON USING UWC, ``UWC USERS'') OR (ii) THE FITNESS OF THE
ELECTRONIC MASTER CERTIFICATES FOR ANY PURPOSE. USE OF UWC AND/OR
ELECTRONIC MASTER CERTIFICATES BY ANY UWC USER SHALL BE DEEMED TO
CONSTITUTE A WAIVER OF ANY AND ALL CLAIMS (WHETHER DIRECT OR INDIRECT)
AGAINST DTC AND ITS AFFILIATES, AND AN AGREEMENT THAT DTC
[[Page 78378]]
AND ITS AFFILIATES SHALL NOT BE LIABLE FOR ANY LOSS, COST, EXPENSE OR
LIABILITY IN RELATION TO THE USE OF UWC AND/OR DISSEMINATION OR USE OF
RELATED DOCUMENTATION, INCLUDING MASTER CERTIFICATES OF DEPOSIT, WHICH
ARE PROVIDED ``AS IS.''
EACH PARTICIPANT AGREES TO INDEMNIFY AND HOLD HARMLESS DTC AND ITS
AFFILIATES FROM AND AGAINST ANY AND ALL LOSSES, DAMAGES, COSTS,
JUDGMENTS, CHARGES AND EXPENSES ARISING OUT OF OR RELATING TO ANY USE
OF UWC BY THE PARTICIPANT AND/OR ANY UWC USER, INCLUDING BUT NOT
LIMITED TO ANY ISSUANCES OF CERTIFICATES OF DEPOSIT AND RELATED
TRANSACTIONS BY SUCH PERSON OR ITS AFFILIATES, AGENTS, CUSTOMERS OR
DESIGNEES.''
This proposed change would facilitate the implementation and use of
System E-CD Templates, as described above, and set forth a disclaimer
by DTC and indemnification consistent with the requirements of DTC's
current Rule and Procedures which allocate the responsibility to
Participants for the accuracy of information and instructions provided
by them to DTC and the indemnification of DTC by Participants in this
regard.\44\
---------------------------------------------------------------------------
\44\ See OA, supra note 3 at ii-iii and Rule 6, supra note 3.
---------------------------------------------------------------------------
d. Exhibit B, which sets forth timeframes for submission of
documents by Participants to DTC Underwriting in connection with
eligibility requests, would be revised to reflect that the timeframes
described in the exhibit relate to documents and information submitted
through UWC, in addition to UW SOURCE. The proposed change to Exhibit B
would align timeframes for submissions through UWC with those that
apply to submissions to UWSOURCE.
e. Technical changes with respect to spelling, punctuation and
spacing of text would also be made. The proposed technical changes to
the OA would provide enhanced clarity for Participants and Issuers with
respect to Procedures relating to eligibility processing and the
Deposit of CDs.
Proposed Changes to the Underwriting Service Guide
a. A glossary description provided for BLOR in the Underwriting
Guide currently describes a BLOR as an agreement between DTC and an
issuer of municipal securities. As described above, a BLOR or LOR is
required to be submitted with respect to any issue of BEO Securities
which also includes corporate Securities. Pursuant to the proposed rule
change, the text would be clarified so that the description of the term
BLOR is not described as limited to applying only to municipal
Securities. The proposed change to this glossary description would
provide enhanced clarity for Participants and Issuers with respect to
Procedures relating to eligibility documentation required for BEO
Securities.
b. Pursuant to the proposed rule change, DTC would eliminate
references to the Participant Terminal System (``PTS'') functions ART
and PUND as these functions have become obsolete. ART related to
inquiries about transactions of a Participant processed by DTC and PUND
related to inquiries relating to issues and certificates for issues
held by a Participant. Participant inquiries may now be directed to the
Client Center available on dtcc.com.\45\ The proposed rule change would
update the Underwriting Service Guide to provide clarity for
Participants on how to submit inquires relating to DTC's services.\46\
---------------------------------------------------------------------------
\45\ See Securities Exchange Act Release No. 88050 (January 27,
2020), 85 FR 5728 (January 31, 2020) (File No. SR-DTC-2020-002).
\46\ Id.
---------------------------------------------------------------------------
c. Pursuant to the proposed rule change, a reference to the IMPP
function in PTS would be deleted. The IMPP function allowed
Participants to view Important Notices about underwriting, transfer
agents, and money market instruments (``MMI''). This function is not
being widely used by Participants. All DTC Important Notices are
accessible on dtcc.com.\47\
---------------------------------------------------------------------------
\47\ See https://www.dtcc.com/legal/important-notices.
---------------------------------------------------------------------------
d. The Section titled ``Packaging Inquiries'' provides information
and requirements relating to the delivery of securities to DTC.
Pursuant to the proposed rule change, DTC would add the following text
under a subheading titled ``Retail (brokered) Certificates of Deposit''
to note the existence of the proposed process for E-CDs with a
reference to the OA for additional information:
In lieu of issuing and delivering physical master certificates to
DTC, the Underwriter can facilitate issuance of Retail CDs for state
and federally chartered banks in electronic form by using available
master certificate templates through the Underwriting Central system
(``UWC''), in accordance with the provisions of the OA.
Each electronic master certificate deposited at DTC is stored in a
secure electronic vault maintained by DTC.''
This Section would also include use, waiver of liability and
indemnification provisions as follows:
IMPORTANT LEGAL NOTE:
DTC DOES NOT VALIDATE, CERTIFY, REPRESENT OR SEEK TO CONFIRM (i)
THE VALIDITY OF THE DATA ELEMENTS ENTERED BY A PARTICIPANT, ITS
CORRESPONDENT UNDERWRITERS AND OR VENDORS INTO UWC (TOGETHER WITH ANY
OTHER PERSON USING UWC, ``UWC USERS'') OR (ii) THE FITNESS OF THE
ELECTRONIC MASTER CERTIFICATES FOR ANY PURPOSE. USE OF UWC AND/OR
ELECTRONIC MASTER CERTIFICATES BY ANY UWC USER SHALL BE DEEMED TO
CONSTITUTE A WAIVER OF ANY AND ALL CLAIMS (WHETHER DIRECT OR INDIRECT)
AGAINST DTC AND ITS AFFILIATES, AND AN AGREEMENT THAT DTC AND ITS
AFFILIATES SHALL NOT BE LIABLE FOR ANY LOSS, COST, EXPENSE OR LIABILITY
IN RELATION TO THE USE OF UWC AND/OR DISSEMINATION OR USE OF RELATED
DOCUMENTATION, INCLUDING MASTER CERTIFICATES OF DEPOSIT, WHICH ARE
PROVIDED ``AS IS.''
EACH PARTICIPANT AGREES TO INDEMNIFY AND HOLD HARMLESS DTC AND ITS
AFFILIATES FROM AND AGAINST ANY AND ALL LOSSES, DAMAGES, COSTS,
JUDGMENTS, CHARGES AND EXPENSES ARISING OUT OF OR RELATING TO ANY USE
OF UWC BY THE PARTICIPANT AND/OR ANY UWC USER, INCLUDING BUT NOT
LIMITED TO ANY ISSUANCES OF CERTIFICATES OF DEPOSIT AND RELATED
TRANSACTIONS BY SUCH PERSON OR ITS AFFILIATES, AGENTS, CUSTOMERS OR
DESIGNEES.
The proposed changes to this section would facilitate the
implementation and use of System E-CD Templates, as described above,
and set forth a disclaimer by DTC and indemnification consistent with
the requirements of DTC's current Rule and Procedures which allocate
the responsibility to Participants for the accuracy of information and
instructions provided by them to DTC and the indemnification of DTC by
Participants in this regard.\48\
---------------------------------------------------------------------------
\48\ See Underwriting Service Guide at 2-3, supra note 3 at ii-
iii and Rule 6, supra note 3.
---------------------------------------------------------------------------
System Access and Information Security Considerations
A Participant controls access to its account and transaction
information relating to its holdings and activity in DTC's systems
through DTCC's access
[[Page 78379]]
coordinator program.\49\ This program includes, but is not limited to,
controls on access to UWSOURCE, and would also encompass UWC access
upon implementation of the proposal. DTC may provide to the issuer of
any security, including but not limited to CDs, at any time credited to
the Account of a Participant the name of the Participant and the amount
of the issuer's securities so credited, and the Corporation is
authorized to provide similar information to any appropriate
governmental authority.\50\ An issuer must provide authorization
annually for a third party agent to obtain access to an position
information with respect to Securities of such issuer.\51\
---------------------------------------------------------------------------
\49\ https://www.dtcc.com/client-center/access-coordinators.
\50\ See Rule 2, supra note 3.
\51\ See OA, supra note 3 at 55.
---------------------------------------------------------------------------
DTCC, for itself and on behalf of its subsidiaries, including DTC,
maintains a privacy policy, which among other things, states that DTCC
maintains an information security program setting forth standards for
maintaining administrative, technical and physical safeguards to
protect the personal information provided by users of services, which
would include personal information provided through the E-CD program,
against accidental, unlawful or unauthorized destruction, loss,
alteration, access, disclosure or use. DTCC periodically tests the
security protections of its information systems and monitors the
effectiveness of its information security controls, systems and
procedures.\52\
---------------------------------------------------------------------------
\52\ See Privacy Policy on DTCC website, available at https://www.dtcc.com/privacy.
---------------------------------------------------------------------------
Implementation Timeframes
The proposed rule change would be implemented by DTC in two phases,
with the first phase beginning after approval of the proposed rule
change by the Commission and prior to the end of January 2021.
Initially, underwriters would be invited to participate, on a
voluntary basis. The underwriters that would participate in this
initial phase are those that expressed interest in participating after
outreach by DTC to those Participants that participated in the
development of the proposed E-CD program. The Participants that would
participate during the first phase are those Participants that expect
to be able to submit an issuance during this phase that would meet the
requirements of the proposed E-CD program, as those requirements are
described above. This phased approach to implementation would
facilitate a smooth transition, from an operational perspective, for
ultimately making UWC available for all E-CD offerings of state and
federally chartered banks that conform to the System Templates.
Subsequently, the E-CD program would be made available to all
underwriters in early 2021, with the implementation date of such
availability to be announced via Important Notice. Upon approval of the
proposed rule change, a legend would be added to the OA and
Underwriting Service Guide indicating that the applicable provisions
relating to E-CDs would apply only to (i) issuers whose issuances are
submitted to DTC through UWC and (ii) Participants that submit and/or
hold eligible issuances submitted through UWC, during this first phase,
until a date to be announced by DTC via Important Notice when the E-CD
program would become available, on a voluntary basis, for all eligible
issuances. This legend would read as follows:
Applicable provisions relating to UWC and Electronic Master
Certificates for Certificates of Deposit, as described herein, apply
only to (i) Issuers whose issuances are submitted to DTC through UWC,
and (ii) Participants that submit and/or hold eligible issuances
submitted through UWC during an initial phase of the electronic CD
program, until a date to be announced by DTC via Important Notice when
the E-CD program would become available, on a voluntary basis, for all
eligible issuances of state and federally chartered banks. This legend
will be removed upon full implementation of the E-CD program on a date
to be announced via Important Notice.
Issuers and underwriters that choose not to use the new E-CD
program could continue to use the existing process through UW SOURCE,
including making Deposits using physical certificates.
2. Statutory Basis
Section 17A(b)(3(F) of the Act
The Clearing Agencies believe that the Framework is consistent with
Section 17A(b)(3)(F) of the Act,\53\ for the reasons described below.
---------------------------------------------------------------------------
\53\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
Section 17A(b)(3)(F) of the Act \54\ requires, inter alia, that the
rules of a clearing agency be designed 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. As described above, the
proposed rule change would provide for the issuance of Electronic
Master Certificates for E-CDs which would be stored in a secure E-
Vault, as described above. Therefore, by providing for the storage of
E-CDs in a secure electronic vault, the proposed rule change is
designed to assure the safeguarding of securities which are in the
custody or control of DTC.
---------------------------------------------------------------------------
\54\ Id.
---------------------------------------------------------------------------
Section 17A(b)(3)(F) of the Act also requires that the rules of the
clearing agency be designed, inter alia, to promote the prompt and
accurate clearance and settlement of securities transactions. DTC
believes that the proposed rule change is consistent with this
provision of the Act because DTC believes that the proposed E-CD
program would reduce closing delays caused by disruptions to physical
delivery of certificates by eliminating the need for DTC to receive
original paper master certificates in advance of CD issuances that
would be eligible for issuance through the new program. Therefore, by
facilitating the potential reduction of closing delays for issuances of
CDs that utilize the E-CD program, DTC believes that the proposed rule
change would promote the prompt and accurate clearance and settlement
of securities transactions.
DTC also believes that the proposed rule changes are consistent
with Section 17A(b)(3)(F), cited above, because by making technical
changes with respect to spelling, punctuation and spacing of text
within the Procedures, as described above, the proposed rule change
would provide enhanced clarity for Participants and Issuers with
respect to Procedures relating to eligibility processing and the
Deposit of CDs. By providing Participants and Issuers with enhanced
clarity with regard to the Procedures relating to, and therefore
facilitating eligibility processing and the Deposit of CDs that may be
the subject of transactions processed through the DTC system, DTC
believes that the proposed rule change would promote the prompt and
accurate clearance and settlement of securities transactions consistent
with the Act.
Rule 17Ad-22(e)(1)
Rule 17Ad-22(d)(1) promulgated under the Act \55\ requires that
each registered clearing agency shall establish, implement, maintain
and enforce written policies and procedures reasonably designed to
provide for a well-founded, clear, transparent, and enforceable legal
basis for each aspect of its activities in all relevant jurisdictions.
As described above, DTC believes that requiring E-CDs at DTC to be
negotiable instruments governed by New York law would allow for the
valid issuance into
[[Page 78380]]
DTC of E-CDs of issuers in all relevant jurisdictions. Therefore, by
providing for E-CDs to be deemed negotiable instruments governed by New
York law, as described above, DTC believes that DTC's Rules and
Procedures, as amended by the proposed rule change, would provide for a
well-founded, clear, transparent, and enforceable legal basis for the
valid issuance of E-CDs into DTC from issuers domiciled in any relevant
jurisdiction.
---------------------------------------------------------------------------
\55\ 17 CFR 240.1717Ad-22(d)(1).
---------------------------------------------------------------------------
Also, as described above, because DTC believes the Section 16 UETA
provisions are more robust than ESRA and the guidance in Section 16 of
UETA is more developed, the proposal provides would provide that E-CDs
that would be made eligible by DTC would be structured to meet the
requirements of UETA, including the Section 16 Safe Harbor, even
though, as discussed above, the E-CDs would also be structured so that
they are governed by New York law (including ESRA).\56\ DTC believes
that this construct will help ensure that an E-CD also would be valid
in the jurisdictions that have adopted Section 16 of UETA, in the
unlikely event that a court of competent jurisdiction would determine
not to recognize the selection of New York law. Therefore, DTC believes
that structuring E-CDs to meet the requirements of UETA would allow
DTC's Rules and Procedures to provide additional support for a well-
founded, clear, transparent, and enforceable legal basis for the valid
issuance of E-CDs into DTC from issuers domiciled in jurisdictions that
have adopted Section 16 of UETA.
---------------------------------------------------------------------------
\56\ Although Section 307 of ESRA does not provide the same
robust provisions and commentary as Section 16 of UETA, it is still
sufficiently clear that E-CDs that meet the Uniqueness Standard are
valid.
---------------------------------------------------------------------------
DTC believes that with respect to all jurisdictions, including
those that have not adopted Section 16 of UETA or ESRA, the Procedures,
as amended pursuant to the proposed rule change, would continue to
facilitate the issuance of CDs in physical form into DTC. As indicated
above, the validity of a physical security does not depend on the
provisions of electronic signature laws. DTC believes that Article 8 of
the UCC as adopted in all relevant jurisdictions allows for the
physical issuance of CDs as securities. Therefore, an issuer from any
relevant jurisdiction would continue to be able to issue valid CDs in
physical form that meet DTC's eligibility requirements into DTC.
Therefore, DTC believes that DTC's Procedures, as amended pursuant to
the proposed rule change, would continue to provide a well-founded,
clear, transparent, and enforceable legal basis for the valid issuance
of CDs into DTC from issuers domiciled in any relevant jurisdiction.
Rule 17Ad-22(e)(10)
Rule 17Ad-22(d)(10) promulgated under the Act \57\ requires that
each registered clearing agency shall establish, implement, maintain
and enforce written policies and procedures reasonably designed, inter
alia, to, as applicable, establish and maintain operational practices
that manage the risks associated with such physical deliveries. As
mentioned above, the proposed rule change would eliminate the
requirement for the delivery of a physical master certificate for a CD
offering to the extent it is eligible for, and processed through, the
electronic process established through UWC, and stored in the E-Vault.
DTC believes the proposed electronic process for Delivery of E-CDs to
DTC would reduce risks of loss related to the physical CDs that would
otherwise be physically transported to DTC for Deposit and later
returned to issuers or their agents for redemption upon maturity of the
CD. Therefore, by reducing the risk of loss of physical master
certificates by allowing their replacement with Electronic Master
Certificates, DTC believes that the proposed rule change would
establish and maintain operational practices that manage risks
associated with eligible offerings of CDs, as described above.
---------------------------------------------------------------------------
\57\ 17 CFR 240.1717Ad-22(d)(10).
---------------------------------------------------------------------------
Rule 17Ad-22(e)(11)
Rule 17Ad-22(e)(11) promulgated under the Act \58\ requires that
each covered clearing agency shall establish, implement, maintain and
enforce written policies and procedures reasonably designed to, as
applicable, when the covered clearing agency provides central
securities depository services: (i) Maintain securities in an
immobilized or dematerialized form for their transfer by book entry,
ensure the integrity of securities issues, and minimize and manage the
risks associated with the safekeeping and transfer of securities; (ii),
inter alia, prevent the unauthorized creation or deletion of
securities; and (iii) Protect assets against custody risk through
appropriate rules and procedures consistent with relevant laws, rules,
and regulations in jurisdictions where it operates.
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\58\ 17 CFR 240.1717Ad-22(d)(11)(i)(ii) and (iii).
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DTC believes the proposed rule change is consistent with the
provisions of Rule 17Ad-22(e)(11)(i), cited above, because (i) by
providing for the Deposit of Securities in the name of Cede & Co. to be
deposited in electronic form and stored in an electronic vault, the
proposed rule change would provide for the immobilization and
dematerialization of master certificates for the transfer of CDs by
book entry, (ii) the integrity of E-CDs would be maintained by such
storage in the secure electronic vault and (iii) it would minimize the
risks associated with the safekeeping and transfer of securities by
providing for purely electronic processing of the certificates and
therefore preventing potential of loss of certificates if the
applicable issues were to be issued and processed in physical form.
DTC believes the proposed rule change is consistent with the
provisions of Rule 17Ad-22(e)(11)(ii), cited above, because it would
provide for a process allowing the issuance and Deposit of the related
Securities through the use of UWC and associated System Templates for
creation of E-CDs, signature of E-CDs and Delivery of the E-CDs to DTC
for storage in the E-Vault. Through the use of this centralized process
for issuance and processing of CDs, the proposed rule change would
facilitate the prevention of the unauthorized creation or deletion of
securities processed through the E-CD program.
DTC believes the proposed rule change is consistent with the
provisions of Rule 17Ad-22(e)(11)(iii) because, as discussed above, it
would provide for Procedures for the issuance of E-CDs, Deposit of E-
CDs, and custody of E-CDs in the E-Vault in a manner consistent with
the requirements applicable to the validity of electronic negotiable
instruments under the NYUCC and the e-signature laws, as discussed
above. The applicable Procedures would be established through proposed
rule changes to the Underwriting Service Guide and the OA, and the
utilization of Electronic Master Certificates in the forms of System E-
CD Templates issued under the applicable E-CD BLOR, as discussed above.
Therefore, DTC believes that E-CDs issued, Deposited and stored in
accordance with the proposed rule change would be Financial Assets that
constitute Eligible Securities under the Rules, and would be valid and
binding negotiable instruments under applicable law, and therefore
protect the applicable assets against custody risk through appropriate
rules and procedures consistent with relevant laws, rules, and
regulations in jurisdictions where DTC operates.
[[Page 78381]]
(B) Clearing Agency's Statement on Burden on Competition
Once the proposed rule change is fully implemented as described
above, DTC does not believe that the proposed rule change would have
any impact, or impose any burden, on competition because the proposed
rule change provides for an additional method under which Participants
may request eligibility of, process, and Deliver CDs on a voluntary
basis. The new method would be available to all Participants through
UWC, on a date to be announced by Important Notice.
The existing method for Deposit of CDs at DTC, that includes the
use of a physical master certificate, would continue to remain
available to all Participants even after the new E-CD process was
implemented.
DTC does not believe that the aspect of the proposed rule change to
initially make the proposed E-CD process available to a subset of
Participants prior to full implementation, as described above, would
have any impact, or impose any burden on competition. Participants not
participating in the initial phase described above would be able to
continue to Deposit eligible CDs in physical form. However, to the
extent the proposed rule change could cause a burden because certain
Participants would continue to be able to Deliver electronic
certificates during an interruption of Participants' ability to make
physical delivery of securities to DTC, and/or DTC's ability to accept
physical deliveries of securities, DTC does not believe the burden have
a significant impact on competition because Participants could utilize
the LOP process, mentioned above, to effect Delivery of a security
represented in physical form to DTC despite any such interruption of
physical delivery services.
DTC does not believe that the proposed rule change to make
technical changes with respect to spelling, punctuation and spacing of
text within the Procedures, as described above, would have any impact,
or impose any burden, on competition because the technical changes
would merely provide enhanced clarity with respect to the Procedures
and not have an effect on the rights or obligations of Participants
and/or Issuers with respect to eligibility processing and Deposit of
Eligible Securities at DTC.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
DTC has not solicited or received any written comments relating to
this proposal. DTC will notify the Commission of any written comments
received by the DTC.
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 [email protected]. Please include
File Number SR-DTC-2020-017 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-2020-017. 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 website (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 website 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 website
(https://dtcc.com/legal/sec-rule-filings.aspx). All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-DTC-2020-017 and should be submitted on
or before December 28, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\59\
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\59\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-26676 Filed 12-3-20; 8:45 am]
BILLING CODE 8011-01-P
