[Federal Register Volume 80, Number 142 (Friday, July 24, 2015)]
[Notices]
[Pages 44178-44179]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-18135]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-75487; File No. SR-DTC-2015-007]
Self-Regulatory Organizations; The Depository Trust Company;
Order Approving Proposed Rule Change Regarding the Discontinuance of
the Distribution of Fractional Shares in Respect of Corporate Actions
for New Issues in DTC's System
July 20, 2015.
I. Introduction
On May 27, 2015, The Depository Trust Company (``DTC'') filed with
the Securities and Exchange Commission (``Commission'') proposed rule
change SR-DTC-2015-007 pursuant to section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to discontinue the option offered by DTC to
issuers that allows for the distribution of fractional shares of
securities in DTC's system, when DTC is handling fractional
dispositions of shares resulting from corporate actions, for new
issues, as more fully described below. The proposed rule change was
published for comment in the Federal Register on June 8, 2015.\3\ The
Commission did not receive comment letters regarding the proposed
change. For the reasons discussed below, the Commission is granting
approval of the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 75094 (June 2, 2015), 80
FR 32425 (June 8, 2015) (File No. SR-DTC-2015-007).
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II. Description of the Proposed Rule Change
The following is a description of the proposed rule change, as
provided by DTC:
DTC's purpose with the proposed rule change is to discontinue the
option offered by DTC to issuers that allows for the distribution of
fractional shares of securities in DTC's system, when DTC is handling
fractional dispositions of shares resulting from corporate actions, for
new issues, as more fully described below.\4\
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\4\ Terms not otherwise defined herein have the meaning set
forth in the DTC Rules and Procedures (``DTC Rules''), available at
http://www.dtcc.com/legal/rules-and-procedures.aspx.
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Background
When a securities issue is made eligible at DTC, DTC has offered
three options to the issuer for handling the disposition of fractional
shares in DTC's system resulting from a corporate action for the issue.
The issuer may: (i) Round up to the next full share or drop fractions,
(ii) pay ``cash-in-lieu'' of fractional shares, or (iii) issue the
fractional shares into an identifying number (``Fractional
Identifier'') generated by DTC.\5\ The assets comprising the
disposition of fractional shares, whether in the form of shares or
cash, once received from the issuer's transfer or paying agent, are
credited by DTC in proportional amounts to the respective accounts of
Participants depending on the amount shares of the issue they have on
deposit. Participants then distribute credits on their own books, as
applicable, to their customers that hold beneficial interests in those
shares.
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\5\ The Fractional Identifier generated for the third option
above has been separate from the CUSIP[supreg] identifier
(``CUSIP'') that is universally recognized by the marketplace.
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The first two options for handling the disposition of fractional
shares are specified in the DTC Distributions Service Guide (``Guide'')
\6\ and DTC's Operational Arrangements (``OA'').\7\ Distributions of
fractional shares in DTC's system under the third option are delivered
to Participants in accordance with the provisions of DTC Rule 6 that
are applicable to DTC services related to Deposited Securities.\8\
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\6\ See the Guide, p. 31, available at http://www.dtcc.com/~/
media/Files/Downloads/legal/service-guides/
Distributions%20Service%20Guide%20FINAL%20November%202014.pdf.
\7\ See the OA, p. 31, available at http://www.dtcc.com/~/media/
Files/Downloads/legal/issue-eligibility/eligibility/operational-
arrangements.pdf.
\8\ See DTC Rules (Rule 6 (Services)), p. 45, available at
http://www.dtcc.com/~/media/Files/Downloads/legal/rules/
dtc_rules.pdf.
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Proposal
Fractional shares are not tradable. The distribution of fractional
shares in respect of corporate actions reduces efficiencies for
investors in an issue, including with respect to the value and
transferability of assets delivered, as investors are required to wait
for an extended period for the aggregation of fractional shares into a
full share that may be traded. Tracking, processing and reporting of
fractional shares separately from the associated CUSIP, which are
necessitated by this process, increases costs to DTC and the industry.
In order to improve efficiencies for investors and reduce costs for
DTC and the industry, DTC has proposed to discontinue the option for
issuers to distribute any fractional shares for new issues into DTC's
system. DTC will continue to allow issuers undergoing a corporate
action with a choice between:
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(i) the rounding up and dropping of fractions, and (ii) the payment of
cash-in-lieu of fractional shares. DTC will maintain the Fractional
Identifiers previously designated for existing fractional shares within
DTC, and continue to perform corporate actions processing with respect
to those Fractional Identifiers.
Implementation
The effective date of the proposed rule change will be announced
via a DTC Important Notice.
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \9\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and rules and regulations thereunder applicable
to such organization. Section 17A(b)(3)(F) of the Act requires, among
other things, that the rules of a clearing agency be designed to
promote the prompt and accurate clearance and settlement of securities
transactions, as well as, in general, protect investors and the public
interest.\10\
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\9\ 15 U.S.C. 78s(b)(2)(C).
\10\ 15 U.S.C. 78q-1(b)(3)(F).
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The Commission finds the proposed rule change consistent with the
Act. More specifically, the Commission finds that the proposed rule
change is consistent with section 17A(b)(3)(F) of the Act.\11\ By
eliminating the distribution of fractional shares for new issues within
DTC's system, the proposed rule change should, as represented by DTC,
improve efficiencies for investors relating to the disposition of
fractional shares in corporate-action events, as well as reduce the
costs for DTC and the industry relating to DTC tracking, processing and
reporting on separate Fractional Identifiers for those issues,
consistent with the provisions of section 17A(b)(3)(F) of the Act which
require that the rules of the clearing agency be designed, among other
things, to promote the prompt and accurate clearance and settlement of
securities transactions, as well as, in general, to protect investors
and the public interest.\12\
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\11\ Id.
\12\ Id.
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act and in
particular with the requirements of section 17A of the Act \13\ and the
rules and regulations thereunder.
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\13\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to section 19(b)(2) of the Act,
that proposed rule change SR-DTC-2015-007 be, and hereby is,
approved.\14\
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\14\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-18135 Filed 7-23-15; 8:45 am]
BILLING CODE 8011-01-P