[Federal Register Volume 79, Number 57 (Tuesday, March 25, 2014)]
[Notices]
[Pages 16392-16401]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-06459]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71745; File No. SR-DTC-2013-11]
Self-Regulatory Organizations; Depository Trust Company; Notice
of Filing Amendment Nos. 1 and 2 and Order Instituting Proceedings To
Determine Whether To Approve or Disapprove a Proposed Rule Change To
Specify Procedures Available to Issuers of Securities Deposited at DTC
for Book Entry Services When DTC Imposes or Intends To Impose
Restrictions on the Further Deposit and/or Book Entry Transfer of Those
Securities
March 19, 2014.
On December 5, 2013, The Depository Trust Company (``DTC'') filed
with the Securities and Exchange Commission (``Commission'') proposed
rule change SR-DTC-2013-11 (``Proposed Rules'') pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Exchange Act'') \1\
and Rule 19b-4 thereunder.\2\ The Proposed Rules were published in the
Federal Register on December 24, 2013.\3\ The Commission received nine
comments from seven commenters to the Proposed Rules and two letters
from DTC responding to those comments.\4\ On February 10, 2014, DTC
filed Amendment No. 1 to the Proposed Rules. On March 10, 2014,
[[Page 16393]]
DTC filed Amendment No. 2 to the Proposed Rules.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Release No. 34-71132 (Dec. 18, 2013); 78 FR 77755 (Dec.
24, 2013).
\4\ See Letters to Elizabeth M. Murphy, Secretary, Commission
from: Suzanne H. Shatto dated December 20, 2013 (``Shatto Letter'');
Simon Kogan dated December 22, 2013 (``Kogan Letter''); DTCC BigBake
dated December 27, 2013 (``DTCC BigBake Letter I'') and March 14,
2014 (``DTCC BigBake Letter II''); Brenda Hamilton, Hamilton &
Associates Law Group, PA (``Hamilton Letter''); Charles V. Rossi,
Chairman, STA Board Advisory Committee, Securities Transfer
Association dated January 14, 2014 (``STA Letter''); Louis A
Brillemen, Louise A. Brilleman, P.C. dated January 14, 2014
(``Brilleman Letter''); Gary Emmanuel and Harvey Kesner, Sichenzia
Ross Friedman Ference LLP dated January 14, 2014 (``Sichenzia Letter
I'') and February 24, 2014 (``Sichenzia Letter II''); and Isaac
Montal, Managing Director and Deputy General Counsel, DTCC dated
February 10, 2014 (``DTC Letter I'') and March 3, 2014 (``DTC Letter
II'').
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The Commission is publishing this notice and order to solicit
comments on Amendment Nos. 1 and 2 from interested persons and to
institute proceedings under Section 19(b)(2)(B) of the Exchange Act \5\
to determine whether to approve or disapprove the Proposed Rules. The
institution of proceedings does not indicate that the Commission has
reached any conclusions with respect to any of the issues involved, nor
does it mean that the Commission will ultimately disapprove the
Proposed Rules. Rather, the Commission seeks and encourages interested
persons to provide additional comment on the Proposed Rules to inform
the Commission's analysis of whether to approve or disapprove the
Proposed Rules.
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\5\ 15 U.S.C. 78s(b)(2)(B).
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I. Background
The Proposed Rules specify procedures available to issuers of
securities deposited at DTC when DTC blocks or intends to block the
deposit of additional securities of a particular issue (``Deposit
Chill'') \6\ or prevents or intends to prevent deposits and restrict
book-entry and related depository services of a particular issue
(``Global Lock'').
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\6\ Securities subject to a Deposit Chill remain eligible for
book-entry transfer at DTC.
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A. International Power
DTC filed the Proposed Rules in response to the Commission's
opinion in In the Matter of International Power Group, Ltd.
(``International Power'').\7\ In International Power, the Commission
held that issuers were entitled to ``fair procedures'' under Section
17A(b)(3)(H) when a clearing agency restricts or denies them access to
services.\8\ In addition, the Commission stated that it believes ``DTC
should adopt procedures that accord with the fairness requirements of
Section 17A(b)(3)(H), which may be applied uniformly in any future such
issuer cases.'' \9\ Those procedures must also comply with Section
17A(b)(5)(B) of the Exchange Act, which requires clearing agencies when
prohibiting or limiting a person's access to services, to (1) notify
such person of the specific grounds for the prohibition or limitation,
(2) give the person an opportunity to be heard upon the specific
grounds for the prohibition or limitation, and (3) keep a record.\10\
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\7\ Int'l Power Group, Ltd., Securities Exchange Act Rel. No.
66611 (Mar. 15, 2012), 2012 SEC LEXIS 844.
\8\ Int'l Power, 2012 SEC LEXIS 844, at *16. The Commission also
held that the Commission has jurisdiction under Section 19(f) of the
Exchange Act to review an issuer's appeal of a suspension or
limitation on access to a clearing agency's services. The Commission
remanded the case to DTC to provide fair procedures.
\9\ Int'l Power, 2012 SEC LEXIS 844, at *32.
\10\ Int'l Power, 2012 SEC LEXIS 844, at *24.
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However, the Commission also acknowledged a clearing agency's need
to act to avert ``imminent harm.'' \11\ The Commission stated a
clearing agency may justifiably impose a suspension of services in
advance of providing the issuer with notice and an opportunity to be
heard.\12\ In such circumstances, a clearing agency's procedures
``should balance the identifiable need for emergency action with the
issuer's right to fair procedures'' and any suspension could not be
maintained ``indefinitely without providing expedited fair process to
the affected issuer.'' \13\
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\11\ Int'l Power, 2012 SEC LEXIS 844, at *29.
\12\ Int'l Power, 2012 SEC LEXIS 844, at *29.
\13\ Int'l Power, 2012 SEC LEXIS 844, at *29.
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B. DTC's Role Under Section 17A of the Exchange Act
DTC is the nation's central securities depository, registered as a
clearing agency under Section 17A of the Exchange Act.\14\ DTC performs
services and maintains securities accounts for its participants,
primarily banks and broker dealers (``Participants'').\15\ Participants
may present a security \16\ to be made eligible for DTC's depository
and book-entry services. If DTC accepts the security as eligible for
those services and the security is deposited with DTC for credit to the
securities account of a Participant, it becomes an ``Eligible
Security.'' \17\ Thereafter, other Participants may deposit that
Eligible Security into their respective DTC accounts. Once the Eligible
Security is credited to the account of one or more Participants,
interests in that Eligible Security may be transferred among
Participants by book-entry in accordance with the DTC Rules and
Procedures.
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\14\ See Securities Exchange Act Release No. 20221 (Sept. 23,
1983), 48 FR 45167 (Oct. 3, 1983).
\15\ See 15 U.S.C. 78c(a)(24).
\16\ ``Security'' is defined in DTC's rules as follows: The term
``Security'' has the meaning given to the term ``financial asset''
in Section 8-102 of the [Uniform Commercial Code of New York]. Any
item credited to an Account (by the act of being credited to the
Account) shall be deemed a Security under these Rules and shall be
treated as a financial asset under Article 8 of the [Uniform
Commercial Code of New York]. A Security may be an Eligible
Security, a Deposited Security, a Pledged Security, a Segregated
Security or an MMI Security, or some or all of them collectively, as
the context may require. The term ``Security'' shall not include
Preferred Stock. See DTC Rule 1.
\17\ Eligible Security is defined in DTC's rules as ``a Security
accepted by the Corporation, in its sole discretion, as an Eligible
Security. The Corporation shall accept a Security as an Eligible
Security only (a) upon a determination by the Corporation that it
has the operational capability and can obtain information regarding
the Security necessary to permit it to provide its services to
Participants and Pledgees when such Security is Deposited and (b)
upon such inquiry, or based upon such criteria, as the Corporation
may, in its sole discretion, determine from time to time. The timing
of additions of such issues shall be on a nondiscriminatory basis
consistent with the Corporation's objective to provide the maximum
practical degree of service in facilitating the prompt and orderly
settlement of Securities transactions.'' See DTC Rule 1 and DTC Rule
5, Section 1.
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As provided in the DTC Rules and Procedures, DTC processes the
transfer of interests in Eligible Securities among DTC Participants by
credits and debits to Participant accounts in accordance with the
instructions of delivering and receiving Participants who are parties
to the transaction. DTC Participants agree to be bound by DTC's Rules
and Procedures as a condition of membership.
To facilitate book-entry transfer and other services that DTC
provides for its Participants with respect to Deposited Securities,\18\
Eligible Securities are registered on the books of the issuer
(typically, in a register maintained by a transfer agent) in DTC's
nominee name, Cede & Co. DTC maintains Eligible Securities of an issue
in fungible bulk so that each Participant with an interest in the
security has a pro rata interest in DTC's entire inventory of that
issue, but none of the securities on deposit is identifiable to or
owned by any particular Participant.\19\
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\18\ Deposited Security is defined in DTC's rules as ``an
Eligible Security credited to the Account of a Participant by
Deposit or Delivery. A Deposited Security shall cease to be such if
it becomes a Pledged Security or is Withdrawn.'' See DTC Rule 1.
\19\ See Securities Exchange Act Release No. 19678 (Apr. 15,
1983), 48 FR 17603, 17605, n.5 (Apr. 25, 1983) (describing fungible
bulk); see also N.Y. Uniform Commercial Code, Sec. 8-503, Off. Cmt
1 (``. . . all entitlement holders have a pro rata interest in
whatever positions in that financial asset the [financial]
intermediary holds'').
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DTC's deposit and book-entry transfer services facilitate the
operation of the nation's securities markets. By serving as registered
holder of trillions of dollars of securities, DTC processes the
enormous volume of daily securities transactions by the book-entry
movement without the need to transfer physical certificates.
C. DTC Eligibility Standards
DTC's Rules and Procedures authorize DTC to determine whether to
accept a security as an Eligible Security and when an Eligible Security
will cease to be such.\20\ They also provide that DTC ``may limit
certain services to particular
[[Page 16394]]
issues of Eligible Securities.'' \21\ The standards for determining
whether a security is an Eligible Security are as follows: \22\
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\20\ See DTC Rule 5.
\21\ See DTC Rule 6.
\22\ See DTC's Operational Arrangements, Section I.A.2.
Generally, the issues that may be made eligible for DTC's book-
entry delivery, settlement and depository services are those that
have been issued in a transaction that: (i) Has been registered with
the Commission pursuant to the Securities Act of 1933 (``Securities
Act''); (ii) was exempt from registration pursuant to a Securities
Act exemption that does not involve (or, at the time of the request
for eligibility no longer involves) transfer or ownership
restrictions; or (iii) permits resale of the securities pursuant to
Rule 144A or Regulation S and in all cases such securities otherwise
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meet DTC's eligibility criteria.
Thus, an essential element of DTC eligibility is that the
securities are ``freely tradeable'' or, if restricted by Rule 144A \23\
or Regulation S under the Securities Act, are processed through a
separate program in which Participants acknowledge and agree to comply
with the applicable restrictions.
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\23\ 17 CFR 230.144A.
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In determining whether deposited securities satisfy DTC's
eligibility requirements, DTC may require an issuer to provide an
opinion from outside counsel in order ``to substantiate the legal basis
for eligibility.'' \24\ DTC also reserves the right to require an
opinion of counsel in support of eligibility requirements ``to protect
DTC and its Participants from risk.'' \25\
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\24\ The Operational Arrangements further specify that such
counsel must be ``an experienced securities practitioner, licensed
to practice law in the relevant jurisdiction and in good standing in
any bar to which such practitioner is admitted. See DTC Operational
Arrangements Section I.B.2. Such counsel must be engaged in an
independent private practice (i.e., not in-house counsel) and may
not have a beneficial ownership interest in the security for which
the opinion is being provided or be an officer, director or employee
of the Issuer.'' See DTC Operational Arrangements Section I.A.1.
\25\ Id.
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II. Description of the Proposed Rules
A. Proposed Rule 22(A): Deposit Chills
1. Scope of Proposed Rule 22(A)
Proposed Rule 22(A) sets forth procedures available to issuers of
Eligible Securities where DTC detects unusually large volumes of
deposits of a low priced or thinly traded Eligible Security and, as a
result, determines to impose or intends to impose a Deposit Chill.\26\
The procedures will also apply if DTC imposes or intends to impose a
Deposit Chill pursuant to its obligations under the Securities Act of
1933 (``Securities Act''), the Bank Secrecy Act (``BSA'') or any rules,
regulations, or guidance promulgated under the BSA, including rules or
regulations that the Office of Foreign Asset Control promulgates.\27\
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\26\ See Proposed Rule 22(A)(1).
\27\ Proposed Rule 22(A)(3)(b)(iii).
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However, Proposed Rule 22(A) will not apply when DTC ``impose[s]
operational restrictions on deposits or other services in connection
with ordinary course of business processing of Eligible Securities.''
\28\ One example of ``ordinary course of business processing'' is the
processing of corporate actions, including name changes and stock
splits. It will also not apply to other restrictions in DTC's
Procedures \29\ that do not constitute a Deposit Chill for purposes of
Proposed Rule 22(A).
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\28\ Proposed Rule 22(A)((3)(b)(2).
\29\ ``Procedures'' means the ``Procedures, service guides, and
regulations of the Corporation adopted pursuant to Rule 27, as
amended from time to time.'' See DTC Rule 1. In its filing with the
Commission, DTC proposed to amend this definition to include
``operational arrangements.''
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2. Deposit Chill Notice
DTC will send notice of the Deposit Chill (``Deposit Chill
Notice'') to an issuer:
No later than twenty Business Days \30\ prior to the
imposition of the Deposit Chill or;
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\30\ ``Business Days'' means any day on which DTC is open for
business. See DTC Rule 1.
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No later than three Business Days after imposition of the
Deposit Chill in the event DTC must first impose the Deposit Chill:
[cir] ``in order to prevent imminent harm, injury or other such
consequences to [DTC] or its Participants;'' or
[cir] if DTC ``reasonably determines that such action is necessary
to protect the prompt and accurate clearance and settlement of
securities transactions through [DTC].'' \31\
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\31\ Proposed Rule 22(A)(2).
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The Deposit Chill Notice will inform the issuer of the reasons for
DTC's actions, including the legal authority upon which DTC relies to
impose the Deposit Chill.\32\ It will also provide the date the Deposit
Chill was imposed or the date it will be imposed, should the issuer
fail to respond to the Deposit Chill Notice.\33\
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\32\ Proposed Rule 22(A)(2)(a)(i).
\33\ Id.
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3. Deposit Chill Response
If the issuer elects to contest the Deposit Chill, it may submit a
response (``Deposit Chill Response'') in the form and containing the
substance provided in the Deposit Chill Notice.\34\ If the issuer
demonstrates to DTC's ``reasonable satisfaction'' that the issue
complies with DTC's eligibility requirements and the applicable
Procedures,\35\ the Deposit Chill will be lifted or will not be
imposed. DTC must receive the Deposit Chill Response within twenty
Business Days after the date of the Deposit Chill Notice. However, DTC
may extend this deadline for up to an additional twenty Business Days
if the issuer establishes ``good cause.'' \36\
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\34\ Proposed Rule 22(A)(2)(a)(ii).
\35\ See DTC Rule 5.
\36\ Proposed Rule 22(A)(2)(a)(iv).
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The Deposit Chill Response must include a legal opinion (``Legal
Opinion'') from ``an independent securities counsel retained by the
issuer and reasonably acceptable'' to DTC.\37\ The Legal Opinion must
establish that the security at issue meets DTC's eligibility
requirements by showing either that the securities (i) are not
restricted securities under SEC Rule 144(a)(3),\38\ or (ii) are exempt
from any restrictions on transferability under the Securities Act.\39\
The Legal Opinion must be satisfactory to DTC, but DTC will not
``unreasonably withhold its acceptance'' if the Legal Opinion
``includes the material contents of the Template.'' \40\
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\37\ Proposed Rule 22(A)(2)(a)(iii). In its filing with the
Commission, DTC stated that in determining whether counsel is
acceptable for this purpose ``DTC refers to the relevant provisions
set forth in the Operational Arrangements.'' Those provisions
provide that counsel must be ``an experienced securities
practitioner, licensed to practice law in the relevant jurisdiction
and in good standing in any bar to which such practitioner is
admitted. Such counsel must be engaged in an independent private
practice (i.e. not in-house counsel) and may not have a beneficial
ownership interest in the security for which the opinion is being
provided or be an officer, director or employee of the Issuer.'' See
Operational Arrangements, Section I.A.1. A template legal opinion
(``Template'') will be included with the Deposit Chill Notice.
\38\ 17 CFR 230.144(a)(3).
\39\ The eligibility requirements are set forth in DTC Rule 5
and Section 1 of DTC's Operational Arrangements.
\40\ Proposed Rule 22(A)(2)(b).
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4. Request for Additional Information
Upon receiving the Deposit Chill Response, DTC may request
additional information from the issuer (``Additional Information
Request''). DTC will set a time frame for the issuer's response to the
Additional Information Request (``Additional Information Response''),
but in no case will it be less than ten Business Days from the date of
the Additional Information Request.
5. Deposit Chill Decision
If an issuer submits a Deposit Chill Response, DTC will provide the
issuer
[[Page 16395]]
with a written decision (``Deposit Chill Decision''). An officer of DTC
who did not have a role in the decision to impose the Deposit Chill
(``Officer'') will make the Deposit Chill Decision.\41\
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\41\ ``Officer'' of DTC is defined as ``an Executive Chairman of
the Board and a Chief Executive Officer, each of whom shall be
elected by the Board of Directors from among its own number, a Chief
Operating Officer, one or more Managing Directors, a Secretary, a
Treasurer, a Comptroller and an Auditor, and may include one or more
Assistant Secretaries and one or more Assistant Treasurers. The
officers shall be elected by the Board at the first meeting of the
Board after the annual meeting of the shareholders in each year. The
Board may elect or appoint other officers (including, but not
limited to, a Vice Chairman of the Board, a President and one or
more Vice Presidents), agents and employees, who shall have such
authority and perform such duties as may be prescribed by the Board.
. . . '' See DTC By-Laws Section 3.1.
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Timing of Deposit Chill Decision
If a Deposit Chill was imposed prior to the issuance of a Deposit
Chill Notice, the Deposit Chill Decision will be provided within ten
Business Days after receipt of the Deposit Chill Response or the
Additional Information Response, if applicable. If a Deposit Chill was
not imposed prior to the issuance of a Deposit Chill Notice, the
Deposit Chill Decision will be provided within twenty Business Days
after receipt of the Deposit Chill Response or the Additional
Information Response, if applicable.
Effect of Deposit Chill Decision
The Deposit Chill Decision will result in DTC either: (i) Not
imposing or releasing a Deposit Chill; or (ii) imposing a Global Lock
on the security. DTC will not impose a Deposit Chill or will release a
Deposit Chill already in place ``if the Officer reasonably determines
that the Deposit Chill Response has established that the securities
subject thereof satisfy [DTC's] eligibility requirements'' particularly
that they satisfy DTC's eligibility requirements as set forth in Rule 5
and Section 1 of DTC Operational Arrangements.
DTC will intend to impose a Global Lock if the Officer reasonably
determines that the Deposit Chill Response does not satisfy the
substantive requirements in the Deposit Chill Notice. DTC will also
impose a Global Lock if the issuer does not submit a Deposit Chill
Response within the applicable time period.
Prior to imposition of the Global Lock in this circumstance, an
issuer has ten Business Days to submit a supplemental Deposit Chill
Response (``Supplemental Deposit Chill Response'').\42\ The issuer is
limited in the Supplemental Deposit Chill Response to demonstrating
that (1) it did submit the Deposit Chill Response or Additional
Information Response, if applicable, within the required time frame, or
(2) DTC made a clerical mistake or a mistake arising from an oversight
or omission in reviewing the Deposit Chill Response [or Additional
Information Response, if applicable].\43\ If an issuer submits a
Supplemental Deposit Chill Response, the Officer will provide the
issuer with a written decision (``Supplemental Deposit Chill Response
Decision'') within ten Business Days of its submission.
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\42\ Proposed Rule 22(A)(c)(iii).
\43\ Proposed Rule 22(A)(c)(iii).
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6. The Record
The record for purposes of any appeal to the Commission will be
comprised of:
The Deposit Chill Notice, the Deposit Chill Response, the
Deposit Chill Decision, the Supplemental Deposit Chill Response, the
Supplemental Deposit Chill Response Decision, the Additional
Information Request, and the Additional Information Response;
All documents submitted in connection with the items
listed immediately above and;
Any written communications created pursuant to Proposed
Rule 22(A)(3)(b)(iv), as described below.\44\
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\44\ Proposed Rule 22(A)(b)(3)(iv).
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7. Waiver of Right To Make Submission
If an issuer does not comply with any deadline set pursuant to Rule
22(A) or in a Deposit Chill Notice, it waives its right to make the
submission unless DTC expressly waives or extends in writing the period
for submission.\45\
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\45\ Proposed Rule 22(A)(2)(a).
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8. Reservation of Authority
Once DTC has imposed a Deposit Chill, Proposed Rule 22(A) does not
prevent it from lifting or modifying the Deposit Chill ``to prevent
imminent harm, injury or other such consequences to [DTC] or its
Participants or where [DTC] otherwise reasonably determines that such
action is necessary to protect the prompt and accurate clearance and
settlement of securities transactions through DTC.'' \46\ In addition,
for those same reasons, DTC may impose a Deposit Chill after providing
an issuer with a Deposit Chill Notice or Additional Information Request
but before it has received a Deposit Chill Response or Additional
Information Response without waiting for the applicable deadline to
arrive.\47\ In such circumstances, after the Deposit Chill is imposed,
the procedures in Proposed Rule 22(A)(2)(c) will apply. For example,
DTC will issue the Deposit Chill Decision with ten Business Days after
receiving the Deposit Chill Response or the Additional Information
Response, if applicable.\48\
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\46\ Proposed Rule 22(A)(3)(b)(i)(A).
\47\ Proposed Rule 22(A)(3)(b)(i)(B).
\48\ Proposed Rule 22(A)(3)(c).
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Proposed Rule 22(A) also does not prohibit DTC from communicating
with an issuer, its transfer agent, or other authorized representative
known to DTC in connection with a Deposit Chill.\49\ As noted above,
any such substantive communications will be in writing and part of the
record for purposes of any appeal to the Commission.
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\49\ Proposed Rule 22(A)(3)(b)(iv).
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9. Method of Delivery of Deposit Chill Notice
DTC will send the issuer any Deposit Chill Notice via overnight
courier to the issuer's address in its regulatory filings where it is
incorporated or otherwise organized. If DTC cannot locate the issuer
with reasonable diligence, it will send it the issuer's designee for
service of process or the Secretary of State or any state securities
agency of the State where the issuer is incorporated or otherwise
organized. If the issuer is not incorporated or otherwise organized in
any state, DTC will send them to any similar agent of the jurisdiction
where the issuer is incorporated or otherwise organized.
B. Proposed Rule 22(B)
1. Scope of Proposed Rule 22(B)
The procedures in Proposed Rule 22(B) apply to issuers of Eligible
Securities where DTC imposes or intends to impose a Global Lock \50\ in
conjunction with either of the following:
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\50\ Proposed Rule 22(B)(1).
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Judicial Action or Administrative Proceeding: DTC becomes
aware that the Commission or other federal or state law enforcement or
regulatory authority has commenced a judicial action or administrative
proceeding (``Proceeding'') alleging that ``Defendants'' \51\ sold
Eligible Securities in violation of Section 5 of the Securities Act or
other applicable law.\52\
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\51\ Proposed Rule 22(B) defines ``Defendants'' as a defendant,
defendants, and other subjects of the action.
\52\ Proposed Rule 22(B)(1)(a).
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Deposit Chill: DTC imposes a Global Lock when an issuer
does not satisfy the requirements of lifting or not imposing a Deposit
Chill in Rule 22(A)(2)(c)(ii) and (iii).\53\
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\53\ Proposed Rule 22(B)(1)(b).
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[[Page 16396]]
2. Global Lock Notice
DTC will send notice of the Global Lock (``Global Lock Notice'') to
an issuer:
No later than twenty Business Days prior to the imposition
of the Global Lock \54\ or;
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\54\ Proposed Rule 22(B)(2).
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no later than three Business Days after imposition of the
Global Lock in the event DTC must first impose the Global Lock:
[cir] ``in order to prevent imminent harm, injury or other such
consequences to [DTC] or its Participants;'' or
[cir] if DTC ``reasonably determines that such action is necessary
to protect the prompt and accurate clearance and settlement of
securities transactions through [DTC].'' \55\
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\55\ Proposed Rule 22(B)(2).
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The Global Lock Notice will inform the issuer of the reasons for
DTC's actions, including the legal authority upon which DTC relies.\56\
It will also provide the date the Global Lock was imposed or the date
it will be imposed should the issuer fail to respond to the Global Lock
Notice.\57\ With respect to the issuer's response, the Global Lock
Notice will set forth the following: \58\
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\56\ Proposed Rule 22(B)(2)(a)(i).
\57\ Id.
\58\ Also included with the Global Lock Notice will be a copy of
Proposed Rule 22(B). See Proposed Rule 22(B)(2)(a)(iv).
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3. Global Lock Response
If the issuer elects to contest the Global Lock, it may submit a
response (``Global Lock Response'') in the form and containing the
substance provided in the Global Lock Notice. If the Global Lock Notice
is based on a Proceeding as described in Proposed Rule 22(B)(1)(a), it
will contain notice that a Global Lock will not be imposed, or, if
already imposed, will be released if the issuer demonstrates either (1)
that the Eligible Securities were not the intended subject of the
Proceeding, or (2) that the Proceeding was withdrawn or dismissed on
the merits with prejudice or otherwise resolved in a final, non-
appealable judgment in favor of the Defendants.
DTC must receive the Global Lock Response with twenty Business Days
after the date of the Global Lock Notice. However, DTC may extend this
deadline for up to an additional twenty Business Days if the issuer
establishes ``good cause.''
4. Global Lock Decision
If an issuer submits a Global Lock Response, DTC will provide the
issuer with a written decision (``Global Lock Decision'').\59\
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\59\ Proposed Rule 22(B)(c).
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Timing of Global Lock Decision
If a Global Lock was imposed prior to the issuance of a Global Lock
Notice, the Global Lock Decision will be provided within ten Business
Days after receipt of the Global Lock Response. If a Global Lock was
not imposed prior to the issuance of a Global Lock Notice, the Global
Lock Decision will be provided within twenty Business Days after
receipt of the Global Lock Response.
Effect of Global Lock Decision
The Global Lock Decision will result in DTC either: (i) Not
imposing or releasing a Global Lock; or (ii) imposing or not releasing
a Global Lock on the security. DTC will not impose a Global Lock, or
will release a Global Lock already in place, if it reasonably
determines that the Global Lock Response satisfies the requirements set
forth in the Global Lock Notice.\60\ If DTC reasonably determines that
the Global Lock Response does not satisfy those requirements, it will
impose or not release the Global Lock, as applicable.
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\60\ Proposed Rule 22(B)(2)(c).
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5. Release of Global Lock Stemming From a Proceeding
Proposed Rule 22(B)(3) provides for the release of Global Locks
imposed pursuant to a Proceeding as set forth in Proposed Rule
22(B)(1)(a). However, if the safe harbor under Securities Act Rule 144
is not available to the issuer pursuant to Securities Act Rule
144(i),\61\ the issuer is not eligible for relief under this
provision.\62\ For those issuers, the Global Lock will remain in place
until it complies with the requirements of Securities Act Rule
144(i)(2).\63\
---------------------------------------------------------------------------
\61\ See 17 CFR 230.144(i).
\62\ Proposed Rule 22(B)(3).
\63\ Id.
---------------------------------------------------------------------------
For all other issuers, the length of the Global Lock will depend in
the first instance on whether the issuer is subject to the reporting
requirements of Sections 13(a) and 15(d) of the Exchange Act. If the
issuer is subject to such requirements, the Global Lock will be lifted
six months after the ``Disposition.'' \64\ If the issuer is not subject
to the reporting requirements, the Global Lock will be lifted one year
after either the entry of a judicial order or judgment or, if the
Commission brought an administrative proceeding, the Disposition.\65\
---------------------------------------------------------------------------
\64\ Proposed Rule 22(B)(3)(b). Proposed Rule 22(b)(3)(a)(ii)
defines ``disposition'' as ``a final order of the Commission
pursuant to Rule 360(d)(2) or Rule 411(a) of the Commission's Rules
of Practice that disposes of the claims against those Defendants
allegedly responsible for the violations of Section 5 of the
Securities Act relating to the Eligible Securities.
\65\ Proposed Rule 22(B)(2)(a)(i) and (ii).
---------------------------------------------------------------------------
Under Section 3 of Proposed Rule 22(B), an issuer may be required
to submit a Legal Opinion and/or other evidence or documentation as DTC
may reasonably require.\66\
---------------------------------------------------------------------------
\66\ Proposed Rule 22(B)(3)(c). As with a Legal Opinion
regarding a Deposit Chill Notice, any Legal Opinion an issuer
submits regarding a Global Local Notice must be in a form and
substance satisfactory to DTC and be from an independent securities
counsel reasonably acceptable to DTC. Id.
---------------------------------------------------------------------------
6. Release of a Global Lock Stemming From a Deposit Chill Under
Proposed Rule 22(A)(2)(c)
Section 4 of Proposed Rule 22(B) provides for the release of Global
Locks imposed when an issuer fails to satisfy the requirements for
lifting a Deposit Chill in Sections 2(c)(ii) and (iii) of Proposed Rule
22(A). Like Section 3 of Proposed Rule 22(B), the length of the Global
Lock will depend on whether the issuer is subject to the reporting
requirements under Section 13 or Section 15(d) under the Exchange Act.
If the issuer is such a reporting company, the Global Lock will be
lifted six months after its imposition.\67\ If the issuer is not such a
reporting company, the Global Lock will be lifted one year after its
imposition.\68\ As in Section 3 of Proposed Rule 22(B), a Global Lock
will remain in place for those issuers for which the safe harbor under
Securities Act Rule 144 would be unavailable pursuant to Rule 144(i)
until the issuer complies with the requirements of Securities Act Rule
144(i)(2).\69\
---------------------------------------------------------------------------
\67\ Proposed Rule 22(B)(4).
\68\ Id.
\69\ Id.
---------------------------------------------------------------------------
7. Record
The record for purposes of any appeal to the Commission consists of
the Global Lock Notice, the Global Lock Response, and the Global Lock
Decision.\70\
---------------------------------------------------------------------------
\70\ Proposed Rule 22(B)(2)(d).
---------------------------------------------------------------------------
8. Waiver of Right To Make Submission
If an issuer does not comply with any deadline set pursuant to Rule
22(B) or in a Global Lock Notice, it waives its right to make the
submission unless DTS expressly waives or extends in writing the period
for submission.\71\
---------------------------------------------------------------------------
\71\ Proposed Rule 22(B)(5)(a).
---------------------------------------------------------------------------
9. Reservation of Authority
Once DTC has imposed a Global Lock, Proposed Rule 22(B) does not
prevent it from lifting or modifying the Global Lock ``to prevent
imminent harm, injury or other such consequences to [DTC] or
[[Page 16397]]
its Participants or where [DTC] otherwise reasonably determines that
such action is necessary to protect the prompt and accurate clearance
and settlement of securities transactions through [DTC].'' \72\ In
addition, for those same reasons, DTC may impose a Global Lock after
providing an issuer with a Global Lock Notice but before it has
received a Global Lock Response before the applicable deadline.\73\ In
such circumstances, after the Global Lock is imposed, the procedures in
Section 2(c) of Proposed Rule 22(B) will apply. For example, DTC will
issue the Global Lock Decision with ten Business Days after receiving
the Global Lock Response.\74\
---------------------------------------------------------------------------
\72\ Proposed Rule 22(B)(5)(b)(i)(A).
\73\ Proposed Rule 22(A)(5)(b)(i)(B).
\74\ Proposed Rule 22(B)(5)(c).
---------------------------------------------------------------------------
Proposed Rule 22(B) also does not prohibit DTC from communicating
with an issuer, its transfer agent of other authorized representative
known to DTC in connection with a Global Lock.\75\ As noted above, any
such substantive communications will be in writing and part of the
record for purposes of any appeal to the Commission.
---------------------------------------------------------------------------
\75\ Proposed Rule 22(B)(5)(b)(iv).
---------------------------------------------------------------------------
In addition, nothing in Proposed Rule 22(B) displaces any legal or
regulatory requirements that DTC is subject to under applicable law,
rule or regulation.\76\ If DTC imposes a Global Lock for reasons other
than those described in Proposed Rule 22(B), it will, however, apply
the procedures set forth in Proposed Rule 22(B).\77\
---------------------------------------------------------------------------
\76\ Proposed Rule 22(B)(5)(b)(iii).
\77\ Id.
---------------------------------------------------------------------------
10. Method of Delivery of Global Lock Notice
DTC will send the issuer any Global Lock Notice via overnight
courier to the issuer's address in its regulatory filings where it is
incorporated or otherwise organized.\78\ If DTC cannot locate the
issuer with reasonable diligence, it will send them to the issuer's
designee for service of process or the Secretary of State or any state
securities agency of the State where the issuer is incorporated or
otherwise organized.\79\ If the issuer is not incorporated or otherwise
organized in any state, DTC will send them to any similar agent of the
jurisdiction where the issuer is incorporated or otherwise
organized.\80\
---------------------------------------------------------------------------
\78\ Proposed Rule 22(B)((5)(c).
\79\ Id.
\80\ Id.
---------------------------------------------------------------------------
III. Summary of Comments and DTC's Responses
The Commission received nine comment letters from seven commenters
on the Proposed Rules. DTC submitted two letters responding to
comments. The summary of comments and DTC's responses are organized
into three categories: (i) Notice to issuers, (ii) opportunity to be
heard, and (iii) fair procedures.\81\
---------------------------------------------------------------------------
\81\ Two commenters argued about that the scope of the Proposed
Rules should be broader. Both of these commenters interpret Proposed
Rule 22(A) to apply only when DTC imposes a Deposit Chill upon
detecting ``unusually large volumes of deposits of a low priced or
thinly traded Eligible Security.'' See STA Letter at 3-4; Sichenzia
Letter I at 3. One of these commenters interprets Proposed Rule
22(B) to apply only when DTC becomes aware of a judicial or
administrative proceeding or when an issuer has failed to meet the
threshold for lifting a Deposit Chill. See Sichenzia Letter at 3.
DTC responded that the Proposed Rules are broader than the
commenters' interpretation. See DTC Letter I at 13-14 (citing
Proposed Rule 22(A)(3)(b)(iii) and Proposed Rule 22(B)(5)(b)(iii)).
One commenter believes the Proposed Rules should apply to other
persons using DTC's services, including transfer agents. See STA
Letter at 7-8.
---------------------------------------------------------------------------
A. Notice to Issuers
1. Comments Regarding Meaning of ``Imminent Harm''
One commenter believes that DTC's ability to impose a Deposit Chill
or Global Lock ``to prevent imminent harm, injury or other such
consequences to [DTC] or its Participants, or where [DTC] otherwise
reasonably determines that such action is necessary to protect the
prompt and accurate clearance and settlement of securities transactions
through [DTC]'' is overly broad, ripe for abuse, and has the potential
to render the advance notice procedure meaningless.\82\
---------------------------------------------------------------------------
\82\ See Sichenzia Letter I at 4.
---------------------------------------------------------------------------
Commenters also question what constitutes ``imminent harm'' and
requests that DTC clarify the term.\83\ One commenter believes DTC
should be required to clearly outline the minimum showing of imminent
harm that would be needed to justify the imposition of a restriction
prior to providing the issuer with notice.\84\ This commenter requests
that DTC develop procedures for an expedited proceeding that should
mirror FINRA Rule 9552.\85\ One commenter does not believe that Section
17A authorizes DTC to restrict an issuer's access to its facilities
without prior notice.\86\
---------------------------------------------------------------------------
\83\ See Sichenzia Letter I at 4; Kogan Letter at 3.
\84\ See Kogan Letter at 3.
\85\ See Kogan Letter at 3.
\86\ See Kogan Letter at 2.
---------------------------------------------------------------------------
One commenter does not believe that the Proposed Rules require DTC
to articulate what the ``imminent harm'' is in the Deposit Chill
Notice, but rather only provide notice of the restriction and the
reasons for the restriction. The commenter recommends that DTC be
required to articulate the potential risks and who faces those
risks.\87\
---------------------------------------------------------------------------
\87\ See Kogan Letter at 3.
---------------------------------------------------------------------------
DTC responds that it ``has provided meaningful standards to justify
imposition of restrictions in those cases where prior notice is not
feasible.'' \88\ It cites to International Power where the Commission
stated that DTC may impose restrictions prior to providing notice
``[i]f DTC believes that circumstances exist that justify imposing an
suspension of services with respect to an issuer's securities in
advance of being able to provide the issuer with notice and an
opportunity to be heard on the suspension.'' The Commission further
stated that DTC may act to avoid imminent harm, but it must then
provide ``expedited fair process to the affected issuer.'' \89\
---------------------------------------------------------------------------
\88\ See DTC Letter I at 8.
\89\ Int'l Power, 2012 SEC LEXIS 844, at *29.
---------------------------------------------------------------------------
DTC explains that ``[w]hen its monitoring system detects that
Participants may be in the process of currently and consistently
depositing ineligible securities into the system, DTC may impose a
Deposit Chill without prior notice to stop further deposits of such
ineligible securities.'' \90\ It also believes that Rule 22(A) provides
issuers with expedited fair process. Based on its experience using the
procedures in the Proposed Rule Change over the past months, DTC notes
that in the ``majority of cases'' it has provided notice to issuers
prior to imposing a Deposit Chill.\91\
---------------------------------------------------------------------------
\90\ See DTC Letter I at 9.
\91\ See DTC Letter I at 9.
---------------------------------------------------------------------------
With respect to Global Locks, DTC believes it is able to institute
them as soon as possible once the Commission alleges that the proffered
exemption and all other possible exemptions are not applicable.\92\ As
with Deposit Chills, over the past months DTC has provided notice to
issuers prior to imposing a Global Lock in a majority of cases.\93\
---------------------------------------------------------------------------
\92\ See DTC Letter I at 9.
\93\ See DTC Letter I at 9.
---------------------------------------------------------------------------
2. Comments Regarding the Deposit Chill Notice
One commenter believes that in order for issuers to have the
opportunity to fully understand and respond to the issues raised in the
Deposit Chill Notice, DTC must provide in the Deposit Chill Notice the
reasons for the Deposit Chill or Global Lock in light of DTC's
Eligibility Requirements.\94\ DTC responds that the Proposed Rule
change requires the Deposit Chill Notice and the Global Lock Notice to
contain the
[[Page 16398]]
reasons for the service restriction and provide the required form of
response.\95\
---------------------------------------------------------------------------
\94\ See STA Letter at 4.
\95\ See DTC Letter I at 12.
---------------------------------------------------------------------------
One commenter believes that the named transfer agent of an issuer
should also receive the Deposit Chill Notice and the Global Lock
Notice. This commenter states that providing notice to the transfer
agent would allow it to protect the interests of other registered
shareholders of the issuer, as well as its own interests.\96\ Another
commenter does not believe that notice to a transfer agent is
reasonably calculated to provide notice to the issuer, and instead
suggests notice be given to the registered agent for service of process
or the Secretary of State in the state of incorporation.\97\
---------------------------------------------------------------------------
\96\ See STA Letter at 6. This commenter stated that the
Commission has increasingly sought to impose obligations on transfer
agents in this area and has expressed that transfer agents may fact
liability under Section 5 of the Securities Act in some
circumstances.
\97\ See Kogan Letter at 4.
---------------------------------------------------------------------------
One commenter also believes that DTC should give contemporaneous
notice to the Commission. It believes this is necessary in order for
the issuer to be able to seek a ``stay of the restriction.'' \98\ DTC
responds that it does not need to replicate in its rules the
Commission's Rules of Practice.\99\ Another commenter believes that DTC
should be required to notify law enforcement if it notices ``a pattern
by depositors.'' \100\
---------------------------------------------------------------------------
\98\ See Kogan Letter at 3.
\99\ See DTC Letter I at 12 (citing Rule 420(b) of the
Commission's Rule of Practice, 17 CFR 201.420).
\100\ See Shatto Letter at 1.
---------------------------------------------------------------------------
B. Opportunity To Be Heard
1. Comments Requesting an Opportunity for an In-Person Hearing and
Internal Appeal
Three commenters believe that Section 17A of the Exchange Act
requires DTC to provide affected issuers the opportunity to request a
hearing to appeal the decision to institute a Deposit Chill or Global
Lock within DTC.\101\ Commenters cite to other SRO rules that afford
affected parties the opportunity for a hearing in similar contexts,
specifically, FINRA Rule 6490 and NASDAQ Rule 5815.\102\
---------------------------------------------------------------------------
\101\ See STA Letter at 5; Sichenzia Letter I at 2; Sichenzia
Letter II at 2; Kogan Letter at 4-5. One of these commenters
requests ``a hearing or an internal appeals process that is
meaningful.'' See Sichenzia Letter II at 2.
\102\ See STA Letter at 5; Sichenzia Letter II at 2.
---------------------------------------------------------------------------
Commenters also note that DTC Rule 22 permits issuers to contest
any decision to deny their status as an Eligible Security by filing a
request for a hearing. Such a hearing takes place before three members
of a panel selected by the Chairman of the Board of the Depository
Trust and Clearing Corporation, the parent company of DTC, from a pool
of persons employed by or partners of Participants.\103\ One commenter
notes that in the event that an issuer is subject to a Deposit Chill or
a Global Lock, the effect of that decision by DTC is the same as though
it has been denied status as an Eligible Security. As a result, this
commenter argues that issuers should be afforded a hearing, just as
they are under Rule 22.\104\
---------------------------------------------------------------------------
\103\ See STA Letter at 5; Sichenzia Letter I at 3.
\104\ See STA Letter at 5. Commenters recommend allowing issuers
to use the hearing process outlined in Rule 22. See STA Letter at 5;
Sichenzia Letter I at 3. One of these commenters also recommends
Rule 22 be amended to provide that the three person panels that hear
appeals from decisions made by DTC be comprised of one person that
is employed by, or a partner of, a registered transfer agent. See
STA Letter at 5-6.
---------------------------------------------------------------------------
Another commenter similarly believes issuers must be afforded a
hearing like those provided under DTC Rule 22.\105\ This commenter
believes the Commission thought the issuer in International Power
should have been given a hearing, although the commenter notes the
Commission never held that DTC is required to provide a hearing.\106\
The commenter points to the following statement from the Commission's
opinion: ``DTC has not articulated an adequate rationale for providing
a hearing to an issuer for whose securities DTC will provide no
service, but not to an issuer whose securities are denied those
clearance and settlement services that go to the heart of DTC's role as
a clearing agency.'' \107\ The commenter also believes that the
Commission's references to FINRA Rule 9558, which requires a hearing,
supports its position that the Commission intended for DTC to provide
issuers a hearing.\108\
---------------------------------------------------------------------------
\105\ See Sichenzia Letter II at 2.
\106\ See Sichenzia Letter II at 2.
\107\ See Sichenzia Letter II at 2 (citing Int'l Power, 2012 SEC
LEXIS 844, at *20).
\108\ See Sichenzia Letter II at 2.
---------------------------------------------------------------------------
In response to these comments, DTC states that while Section
17A(b)(3)(H) requires DTC to provide persons with fair procedures when
restricting services and Section 17A(b)(5)(B) requires that fair
procedures include notice and an opportunity to be heard, nothing in
17A requires DTC to provide issuers with an in-person testimonial
hearing.\109\ DTC also provides that the Commission's opinion in
International Power did not specify the procedures DTC should apply,
but rather stated that DTC should ``adopt procedures that accord with
the fairness requirements of Section 17A(b)(3)(H), which may be applied
uniformly in any future such cases.'' \110\ DTC also notes that even
though the Commission refers to DTC Rule 22 in International Power, it
did not state that DTC should apply those procedures when instituting
Deposit Chills or Global Locks.\111\
---------------------------------------------------------------------------
\109\ See DTC Letter I at 2-3.
\110\ Id.
\111\ Id.
---------------------------------------------------------------------------
With respect to the procedures in FINRA Rule 6490 and NASDAQ Rule
5815, DTC responds that it has a different role in the securities
industry than FINRA and NASDAQ.\112\ It notes that FINRA and NASDAQ
have disciplinary and adjudicatory mandates ``to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade. . . .'' \113\ DTC provides that it ``does not
perform a policing function to root out fraudulent and manipulative
conduct in violation of the securities laws.'' \114\ DTC therefore
concludes that ``[t]here is no basis to compare FINRA and NASDAQ's
adjudicatory procedures arising from their policing functions with the
fair procedures provided by DTC for compliance with its eligibility
standards.'' \115\
---------------------------------------------------------------------------
\112\ See DTC Letter I at 5.
\113\ See DTC Letter I at 5 (citing Exchange Act Sections
15A(b)(6) and 6(b)(5)).
\114\ See DTC Letter I at 5.
\115\ See DTC Letter I at 5. DTC also characterizes FINRA Rule
6490 and NASDAQ Rule 5815 as ``appeals from fact-intensive
determinations.'' It contrasts this with the Proposed Rule Change,
which it states does not contemplate that DTC will engage in
independent fact finding. See DTC Letter I at 7.
---------------------------------------------------------------------------
With respect to commenter's assertions that the Commission's
opinion in International Power, and specifically its references to
FINRA Rule 9558, indicates a hearing is required, DTC notes the
Commission's statement that ``DTC may design such processes in
accordance with its own internal needs and circumstances.'' \116\ In
addition, DTC provides that the reference to FINRA Rule 9558 was
regarding notice and expedited fair process where action is necessary
to avoid imminent harm.\117\
---------------------------------------------------------------------------
\116\ See DTC Letter II at 2.
\117\ See DTC Letter II at 2.
---------------------------------------------------------------------------
2. Comments Regarding Due Process
One commenter questions whether DTC's procedures provide issuers
with due process, and specifically the ``opportunity to present its
objections to the allegations that form the justification for the
restriction.'' \118\ It believes DTC should allow the issuer to
``litigate'' the issues raised in the regulatory
[[Page 16399]]
proceeding that forms the basis of a Global Lock.\119\
---------------------------------------------------------------------------
\118\ See Kogan Letter at 4.
\119\ See Kogan Letter at 4.
---------------------------------------------------------------------------
DTC responds by stating that Section 17A establishes its
obligations, not the Fourteenth Amendment's due process clause.\120\ It
further states that even if due process standards did apply, the
Proposed Rules meets those standards; due process does not require an
evidentiary or in-person hearing.\121\
---------------------------------------------------------------------------
\120\ See DTC Letter I at 4.
\121\ Id.
---------------------------------------------------------------------------
C. Fair Procedures
1. Comment Regarding Requirement To Provide a Legal Opinion
One commenter is concerned that Proposed Rule 22(A) gives DTC the
authority to require a Legal Opinion covering any issuer security
deposited at any time rather than only those securities deposited over
the specific time frames that are the subject of concern.\122\ This
commenter states that this open-ended inquiry imposes an unfair burden
on issuers.\123\
---------------------------------------------------------------------------
\122\ See Sichenzia Letter I at 5.
\123\ See Sichenzia Letter I at 5.
---------------------------------------------------------------------------
2. Comments Regarding Disproportionate Burden on Smaller Issuers
Commenters note that most of the issuers affected by DTC's actions
with respect to the imposition of a Deposit Chill or Global Lock will
likely be small and midsize companies, and that Restraints of DTC
services can dramatically affect the lives of the officers, directors,
and shareholders of these companies.\124\ For this reason, two
commenters believe that DTC must ensure a fair process that will reduce
the likelihood of harm to innocent parties--including the issuer and
its investors.\125\
---------------------------------------------------------------------------
\124\ See STA Letter at 2; Sichenzia Letter I at 6.
\125\ See STA Letter at 2.
---------------------------------------------------------------------------
One commenter questions why Sections 3 and 4 of Proposed Rule 22(B)
adversely treats former shell companies and believes they should be
treated the same as any other public companies.\126\
---------------------------------------------------------------------------
\126\ See Sichenzia Letter I at 6.
---------------------------------------------------------------------------
3. Comments Regarding Timing for Lifting a Deposit Chill
One commenter believes that the timing for lifting a Deposit Chill
as compared to a Global Lock is counter-intuitive.\127\ According to
this commenter, a Global Lock, which is typically imposed as a result
of enforcement proceedings, should not be easier to remedy than a
Deposit Chill, which is usually imposed based on ``mere'' concerns
regarding a security's eligibility.\128\ The commenter recommends that
Deposit Chills be lifted automatically after a certain period of
time.\129\
---------------------------------------------------------------------------
\127\ See Brilleman Letter at 2.
\128\ See Brilleman Letter at 2.
\129\ See Brilleman Letter at 2.
---------------------------------------------------------------------------
One commenter is concerned that the Proposed Rules do not address
cases of issuers whose securities were subjected to a Deposit Chill
prior to the Commission's opinion in International Power.\130\ This
commenter suggests Deposit Chills imposed prior to International Power
be lifted after a certain period of time or DTC should follow
procedures to make a ``fairness determination'' based on the facts and
circumstances of a particular case.\131\ In its response, DTC states
that if an issuer whose securities were restricted prior to
International Power requests a review, DTC has been following the
procedures in the Proposed Rules.\132\
---------------------------------------------------------------------------
\130\ See Brilleman Letter at 1.
\131\ See Brilleman at 1.
\132\ See DTC Letter I at 13.
---------------------------------------------------------------------------
4. Comments Regarding Timing for Lifting a Global Lock
Under Proposed Rule 22(B), the trigger for releasing a Global Lock
is the resolution of the regulatory matter in a judicial order or an
administrative decision (or some other indication that the issuer was
incorrectly identified in the Proceeding). One commenter believes this
standard is not workable because matters instituted by regulatory
agencies may not be resolved for many years, if at all, may not be
resolved in a formal fashion, and may be resolved only regarding some
Defendants or some claims.\133\ The commenter recommends that issuers
affected by a Global Lock or a Deposit Chill should be permitted to
apply to DTC one year after the imposition of any Deposit Chill or
Global Lock to have their affected securities declared Eligible
Securities.\134\ This application could include a Legal Opinion that
DTC may rely upon, and DTC could afford issuers a hearing under DTC
Rule 22 should DTC determine not to release the relevant restriction
based on the Legal Opinion.\135\
---------------------------------------------------------------------------
\133\ See STA Letter at 6.
\134\ See STA Letter at 7.
\135\ See STA Letter at 7.
---------------------------------------------------------------------------
Another commenter argued that the timing for the release of a
Global Lock is too long and stated ``it would be a near miracle if a
public company in need of working capital were able to survive through
years of being subject to a [G]lobal [L]ock.'' \136\ This commenter
recommended lifting a Global Lock six months or one year after the
commencement of an enforcement proceeding, and believes at such time
the burden is on the Commission to take action to suspend any further
trading in the issuer's securities.\137\
---------------------------------------------------------------------------
\136\ See Sichenzia Letter I at 5.
\137\ See Sichenzia Letter I at 5.
---------------------------------------------------------------------------
5. Comments Regarding Public Notice of Deposit Chills and Global Locks
Two commenters recommend that DTC make a list of companies subject
to Deposit Chills and Global Locks publicly available on its Web
site.\138\ Commenters stated that issuers subject to these restrictions
often do not inform their shareholders or potential investors and at
times issuers misrepresent the reasons for the imposition of the
restrictions in order to continue raising capital.\139\ These
commenters also believe publicizing which issuers are subject to DTC
restrictions would deter future fraudulent securities sales and protect
investors.\140\
---------------------------------------------------------------------------
\138\ See Hamilton Letter at 1; DTCC BigBake Letter I at 1; DTCC
BigBake Letter II at 1.
\139\ See Hamilton Letter at 1; DTCC BigBake Letter I at 1.
\140\ See Hamilton Letter at 1; DTCC BigBake Letter I at 1.
---------------------------------------------------------------------------
One investor also states that publication of issuer and DTC
responses would be beneficial to shareholders and potential
investors.\141\ Another commenter requests the publication of Legal
Opinions, arguing that this would reduce the number of restrictions and
reduce the impact on the market.\142\
---------------------------------------------------------------------------
\141\ See Hamilton Letter at 1.
\142\ See DTCC BigBake Letter I at 2.
---------------------------------------------------------------------------
DTC states that while it understands commenters concerns, it is the
issuer's responsibility to decide whether to disclose all of this
information.\143\ DTC issues an Important Notice when imposing a Global
Lock and those Important Notices are published on DTC's Web site.\144\
In its response, DTC provides that it is considering whether similar
disclosures regarding Deposit Chills would be appropriate.\145\
---------------------------------------------------------------------------
\143\ See DTCC Letter at 12.
\144\ See DTCC Letter at 12.
\145\ See DTCC Letter at 12.
---------------------------------------------------------------------------
6. Comment Regarding Persons Authorized To Initiate Process and Make
Final Determinations
One commenter expressed concern over the number of individuals who
would be ``Officers'' under the Proposed Rules, and thus able to make
decisions to deny an issuer access to DTC.\146\ This commenter stated
any such decisions ``should be given serious and formal consideration
by senior, experienced professionals that are familiar with securities
markets and the federal
[[Page 16400]]
securities laws, and that have the authority and independent to make
decisions.'' \147\ With respect to independence, this commenter
recommends that an Officer making these decisions should be in a
separate reporting line or senior to the Officer who made the initial
decision. Along these lines, the commenter believes the Board of
Directors should appoint specific officers to review issuer responses
and make decisions.\148\
---------------------------------------------------------------------------
\146\ See STA Letter at 4.
\147\ See STA Letter at 4.
\148\ See STA Letter at 4.
---------------------------------------------------------------------------
In its response to these comments, DTC notes that DTC Officers are
by definition ``high ranking and charge with substantial
responsibility.'' \149\ In addition, DTC believes the reviewing Officer
is independent because it was not involved in the decision to impose
the restriction in the first instance.\150\
---------------------------------------------------------------------------
\149\ See STA Letter at 11.
\150\ See STA Letter at 11.
---------------------------------------------------------------------------
One commenter recommends that the Proposed Rules be amended to
require that the initiation of an action to impose Deposit Chills
should be authorized by senior Officers of DTC designated by the Board
of Directors, or the Chief Executive Officer, to take such
actions.\151\ DTC believes this is unnecessary because a senior-level
committee of officers from DTC's Operations, Risk Management, Product
Management, Application Development and Maintenance, Legal and
Compliance currently make, and will continue to make, the decision to
impose service restrictions.\152\
---------------------------------------------------------------------------
\151\ See STA Letter at 4.
\152\ See DTC Letter I at 11.
---------------------------------------------------------------------------
IV. Description of Amendment No. 1
As noted above, one commenter requested that DTC send the Deposit
Chill Notice to the issuer's transfer agent in addition to the issuer
itself.\153\ Amendment No. 1 incorporates this requirement into the
Proposed Rules and provides that DTC will send a copy of the Deposit
Chill Notice to the issuer's transfer agent via overnight courier.
---------------------------------------------------------------------------
\153\ See STA Letter at 6.
---------------------------------------------------------------------------
V. Description of Amendment No. 2
Amendment No. 2 makes a number of clarifying revisions to the
Proposed Rules to more accurately reflect their intended operation.
First, DTC proposes to amend Proposed Rules 22(A)(2)(A)(i) to
clarify that when the Deposit Chill Notice is sent prior to the
imposition of a Deposit Chill, the date included as the date the
Deposit Chill will be imposed sets forth the date in circumstances in
which the issuer does not respond to the Deposit Chill Notice in the
time or manner provided in the Proposed Rules.
Second, DTC proposes to amendment Proposed Rule 22(A)(2)(A)(iv) to
clarify that DTC may extend the date for an issuer to submit a Deposit
Chill Response ``up to'' an additional twenty Business Days.
Third, DTC proposes to revise Proposed Rule 22(A)(2)(c) to provide
when the issuer fails to comply with a deadline in connection with an
Additional Information Request, DTC will provide the issuer with a
Deposit Chill Decision within twenty Business Days after the missed
deadline.
Fourth, DTC proposes to clarify that the Additional Information
Request and the Additional Information Response are part of the record
for purposes of any issuer appeal to the Commission under Proposed Rule
22(A)(2)(d).
Fifth, DTC proposes to amend Proposed Rule 22(A)(3)(a), which
provides that unless the DTC expressly waives or extends in writing the
applicable period for a submission of a Deposit Chill Response, an
issuer waives the right to make the submission for which the deadline
has passed. DTC's amendment would revise this section so that the
reference to a DTC waiver relates to the applicable period for any type
of submission provided for under Proposed Rule 22(A) and not only to a
Deposit Chill Response.
Sixth, DTC proposes to amend Proposed Rule 22(A)(3)(c) to correct
the reference to ``Deposit Chill Response'' by replacing it with
``Deposit Chill Decision.''
Seventh, among the criteria for determining the application of the
procedures provided under Proposed Rule 22(B), Section 1(b) provides
that the procedures will apply where a Global Lock has been imposed as
a result of an issuer's failure to satisfy the requirements for lifting
a Deposit Chill in Proposed Rule 22(A)(2)(c). DTC proposes to amend
Proposed Rule 22(B)(1)(b) to clarify that the procedures in Proposed
Rule 22(B) will also apply where an issuer has failed to satisfy the
requirements for not imposing a Deposit Chill.
Eighth, DTC proposes to amend Proposed Rules 22(B)(2)(a)(i) to
clarify that when the Global Lock Notice is sent prior to the
imposition of a Global Lock, the date included as the date the Global
Lock will be imposed sets forth the date in circumstances in which the
issuer does not respond to the Global Lock Notice in the time or manner
provided in the Proposed Rules.
Ninth, DTC proposes to amend Proposed Rule 22(B)(2)(a)(iii) to
clarify that DTC may extend the date for an issuer to submit a Global
Lock Response ``up to'' an additional twenty Business Days.
Tenth, DTC proposes to amend Proposed Rule 22(B)(2)(c) to provide
in the case of a Global Lock imposed before issuance of the Global Lock
Notice, DTC will provide the issuer with a Global Lock Decision within
ten Business Days after receipt of the Global Lock Response, rather
than within ten Business Days after imposition of the Global Lock.
Eleventh, DTC proposes to amend Proposed Rule 22(B)(2)(c) to
clarify that, in the event that DTC reasonably determines that a Global
Lock Response does not satisfy the requirements of the Global Lock
Notice, in addition to not releasing a Global Lock that is already in
place in, DTC will also impose a Global Lock if one is not yet in
place.
Twelfth, DTC proposes to add a new provision providing that if DTC
imposes a Global Lock pursuant to Proposed Rule 22(B)(5)(b) that the
procedures contained in Proposed Rule 22(B) will apply, including that
DTC will provide a Global Lock Decision within ten Business Days after
it receives the Global Lock Response.
VI. Proceedings To Determine Whether to Approve or Disapprove SR-DTC-
2013-11 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act to determine whether the Proposed Rules should
be approved or disapproved. As noted above, institution of proceedings
does not indicate that the Commission has reached any conclusions with
respect to any of the issues involved. Rather, the Commission seeks and
encourages interested persons to comment on the Proposed Rule as set
forth in Amendment Nos. 1 and 2, and provide the Commission with
arguments to support the Commission's analysis as to whether to approve
or disapprove the proposal, as amended.
Pursuant to Section 19(b)(2)(B) of the Exchange Act,\154\ the
Commission is providing notice of the grounds for disapproval under
consideration. In particular, Section 17A(b)(3)(H) requires, among
other things, that the rules of a clearing agency provide a fair
procedure when the clearing agency prohibits or limits access to the
clearing agency's services to a person.\155\ In addition, Section
17A(b)(5) of the Exchange Act requires clearing agencies, when
determining whether to deny or
[[Page 16401]]
limit access to its services, (i) to give persons in any proceeding an
opportunity to be heard upon the specific grounds for the denial,
prohibition, or limitation, and (ii) to keep a record of those
proceedings.\156\
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\154\ 19 15 U.S.C. 78s(b)(2)(B).
\155\ 15 U.S.C. 78q-1(b)(3)(H).
\156\ 15 U.S.C. 78q-1(b)(5).
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As noted above, commenters raised concerns as to whether the
Proposed Rules are consistent with the requirements to provide ``fair
procedures,'' ``notice'' and ``an opportunity to be heard.'' The
Commission believes that question remain as to whether the Proposed
Rules are consistent with the requirements of the Exchange Act.
Section 19(b)(2)(B) of the Act provides that proceedings to
determine whether to approve or disapprove a proposed rule change must
be concluded within 180 days of the date of publication of notice of
the filing of the proposed rule change. The time for conclusion of the
proceedings may be extended for up to an additional 60 days if the
Commission finds good cause for such extension and publishes its
reasons for so finding or if the self-regulatory organization consents
to the extension.
VII. Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
concerns identified above, as well as any others they may have with the
Proposed Rules, as amended. In particular, the Commission invites the
written views of interested persons concerning whether the Proposed
Rules, as modified by Amendment Nos. 1 and 2, are inconsistent with
Sections 17A(b)(3)(H) and 17A(b)(5) or any other provision of the
Exchange Act, or the rules and regulations thereunder.
Although there do not appear to be any issues relevant to approval
or disapproval which would be facilitated by an oral presentation of
views, data, and arguments, the Commission will consider, pursuant to
Rule 19b-4, any request for an opportunity to make an oral
presentation.\157\ Interested persons are invited to submit written
data, views, and arguments on or before April 15, 2014. Any person who
wishes to file a rebuttal to any other person's submission must file
that rebuttal on or before April 29, 2014. Comments may be submitted by
any of the following methods:
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\157\ Section 19(b)(2) of the Exchange Act, as amended by the
Securities Acts Amendments of 1975, Public Law 94-29, 89 Stat. 97
(1975), grants the Commission flexibility to determine what type of
proceeding--either oral or notice and opportunity for written
comments--is appropriate for consideration of a particular proposal
by a self-regulatory organization. See Securities Acts Amendments of
1975, Report of the Senate Committee on Banking, Housing and Urban
Affairs to Accompany S. 249, S. Rep. No. 75, 94th Cong., 1st Sess.
30 (1975).
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Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-DTC-2013-11 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-DTC-2013-11. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filings also will be available
for inspection and copying at the principal office of DTC and on DTC's
Web site at http://dtcc.com/en/legal/sec-rule-filings.aspx. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly.
All submissions should refer to File Number SR-DTC-2013-11 and
should be submitted on or before April 15, 2014. If comments are
received, any rebuttal comments should be submitted on or before April
29, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\158\
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\158\ 17 CFR 200.30-3(a)(57).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-06459 Filed 3-24-14; 8:45 am]
BILLING CODE 8011-01-P