[Federal Register Volume 81, Number 176 (Monday, September 12, 2016)]
[Notices]
[Pages 62775-62780]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-21802]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78774; File No. SR-DTC-2016-003]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing of Amendment No. 1 and Order Instituting Proceedings
To Determine Whether To Approve or Disapprove a Proposed Rule Change,
as Modified by Amendment No. 1, To Impose Deposit Chills and Global
Locks and Provide Fair Procedures to Issuers
September 6, 2016.
I. Introduction
On May 27, 2016, The Depository Trust Company (``DTC'') filed with
the Securities and Exchange Commission (``Commission'') proposed rule
change SR-DTC-2016-003 pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder.\2\ The
proposed rule change was published in the Federal Register on June 9,
2016.\3\ The Commission received eight comment letters to the proposed
rule change from five commenters, including two response letters from
DTC.\4\ Pursuant to Section 19(b)(2) of the Act,\5\ on July 21, 2016,
the Commission designated a longer period within which to approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to disapprove the proposed rule
change.\6\
[[Page 62776]]
On July 29, 2016, DTC filed Amendment No. 1 to the proposed rule
change, as discussed below.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 77991 (June 3,
2016), 81 FR 37232 (June 9, 2016) (SR-DTC-2016-003) (``Notice'').
\4\ See letter from Charles V. Rossi, Chairman, The Securities
Transfer Association (``STA''), Inc. Board Advisory Committee, dated
June 30, 2016, to Brent J. Fields, Secretary, Commission (``STA
Letter I''); letter from Dorian Deyet, dated June 30, 2016 (``Deyet
Letter''); letter from Ann K. Shuman, Managing Director and Deputy
General Counsel, DTC, dated July 21, 2016, to Brent J. Fields,
Secretary, Commission (``DTC Letter I''); letter from Harvey Kesner
(``Kesner''), Sichenzia, Ross, Friedman, Ference, dated August 11,
2016, to Brent J. Fields, Secretary, Commission (``Kesner Letter
I''); letter from Isaac Montal, Managing Director and Deputy General
Counsel, DTC, dated August 22, 2016, to Brent J. Fields, Secretary,
Commission (``DTC Letter II''); letter from Charles V. Rossi,
Chairman, STA Board Advisory Committee, dated August 29, 2016, to
Brent J. Fields, Secretary, Commission (``STA Letter II''); letter
from Kesner, Sichenzia, Ross, Friedman, Ference, dated August 30,
2016, to Brent J. Fields, Secretary, Commission (``Kesner Letter
II''); and letter from Norman B. Arnoff (``Arnoff''), dated
September 4, 2016 to Secretary Fields (``Arnoff Letter''). See
comments on the proposed rule change (SR-DTC-2016-003), https://www.sec.gov/comments/sr-dtc-2016-003/dtc2016003.shtml.
\5\ 15 U.S.C. 78s(b)(2).
\6\ See Securities Exchange Act Release No. 78379 (July 21,
2016), 81 FR 49309 (July 27, 2016). The Commission designated
September 7, 2016, as the date by which it should approve,
disapprove, or institute proceedings to determine whether to
disapprove the proposed rule change.
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The Commission is publishing this notice and order to solicit
comments on Amendment No. 1 from interested persons and to institute
proceedings under Section 19(b)(2)(B) of the Act \7\ to determine
whether to approve or disapprove the proposed rule change, as modified
by Amendment No. 1. 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 rule change. Rather, the Commission
seeks and encourages interested persons to provide additional comment
on the proposed rule change to inform the Commission's analysis of
whether to approve or disapprove the proposed rule change.
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\7\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change and Notice of Filing of
Amendment No. 1
The proposed rule change, as modified by Amendment No. 1, would add
Rule 33 to the Rules, By-Laws and Organization Certificate of DTC
(``Rules'') to establish: (i) The circumstances under which DTC would
impose and release a restriction on Deposits of an Eligible Security
(``Deposit Chill'') or on book-entry services for an Eligible Security
(``Global Lock''); and (ii) the fair procedures for notice and an
opportunity for the issuer of the Eligible Security (``Issuer'') to
challenge the Deposit Chill or Global Lock (each, a ``Restriction''),
as described below.\8\
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\8\ The description of the proposed rule change herein is based
on the statements prepared by DTC in the Notice. Notice, supra note
3, 81 FR at 37232-36. Each capitalized term not otherwise defined
herein has its respective meaning as set forth in the Rules,
available at http://www.dtcc.com/legal/rules-and-procedures.aspx.
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A. Background
i. DTC
DTC stated that it is the nation's central securities depository,
registered as a clearing agency under Section 17A of the Act,\9\ and
that its deposit and book-entry transfer services help facilitate the
operation of the nation's securities markets. According to DTC, by
serving as registered holder of trillions of dollars of Securities, on
a daily basis, DTC processes enormous volumes of securities
transactions facilitated by book-entry movement of interests, without
the need to transfer physical certificates.
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\9\ See Securities Exchange Act Release No. 20221 (September 23,
1983), 48 FR 45167 (October 3, 1983) (600-1).
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DTC performs services and maintains Securities Accounts for its
Participants, primarily banks and broker dealers, pursuant to its Rules
and Procedures. Participants agree to be bound by DTC's Rules and
Procedures as a condition of their DTC membership.\10\ DTC allows a
Participant to present Securities to be made eligible for DTC's
depository and book-entry services. If a Security is accepted by DTC as
meeting DTC's eligibility requirements for services \11\ and is
deposited with DTC for credit to the Securities Account of a
Participant, it becomes an Eligible Security. Thereafter, DTC
explained, Participants may deposit shares of that Eligible Security
into their respective DTC accounts. To facilitate book-entry transfers
and other services that DTC provides for its Participants with respect
to Deposited Securities, DTC explained that the Deposited Securities
are generally registered on the books of the Issuer (typically, in a
register maintained by a transfer agent) in DTC's nominee name, Cede &
Co. DTC further explained that Deposited Securities that are eligible
for book-entry services are maintained in ``fungible bulk,'' (i.e.,
each Participant whose Securities of an issue have been credited to its
Securities Account has a pro rata (proportionate) interest in DTC's
entire inventory of that issue, but none of the Securities on deposit
are identifiable to or ``owned'' by any particular Participant).\12\
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\10\ See supra note 8.
\11\ See Rule 5, supra note 8; DTC Operational Arrangements
(Necessary for Securities to Become and Remain Eligible for DTC
Services), January 2012 (the ``Operational Arrangements''), Section
1, available at http://www.dtcc.com/~/media/Files/Downloads/legal/
issue-eligibility/eligibility/operational-arrangements.pdf.
\12\ See Securities Exchange Act Release No. 19678 (April 15,
1983), 48 FR 17603, 17605, n.5 (April 25, 1983) (describing fungible
bulk); see also N.Y. Uniform Commercial Code, Sec. 8-503, Off. Cmt
1 (``. . . all entitlement holders have a pro rata interest in
whatever positions in that financial asset the [financial]
intermediary holds'').
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ii. Deposit Chills and Global Locks: Prior Procedures
According to DTC, previously, upon detecting suspiciously large
deposits of a thinly traded Eligible Security, DTC imposed or proposed
to impose a Deposit Chill as a measure to maintain the status quo
while, pursuant to its Operational Arrangements,\13\ DTC would then
require the Issuer to confirm by legal opinion of independent counsel
that the Eligible Security fulfilled the requirements for eligibility.
DTC explained that the Deposit Chill would be maintained until the
Issuer provided a satisfactory legal opinion, and that the Deposit
Chill could remain in place for years, due to an Issuer's non-
responsiveness, refusal, or inability to submit the required legal
opinion.
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\13\ See Operational Arrangements, Section I.A, supra note 11.
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With respect to Global Locks, DTC explained that it previously
imposed a Global Lock on an Eligible Security when a governmental or
regulatory authority commenced a proceeding or action alleging
violations of Section 5 of the Securities Act of 1933, as amended, with
respect to such Eligible Security. A Global Lock could be released when
the underlying enforcement action was withdrawn, dismissed on the
merits with prejudice, or otherwise resolved in a final, non-appealable
judgment in favor of the defendants allegedly responsible for the
violations of federal securities laws. However, DTC stated that many
enforcement actions are only resolved after several years \14\ and
commonly without any definitive determination of wrongdoing.\15\
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\14\ See, e.g., SEC v. Kahlon, 12-CV-517 (E.D. Tex., filed
August 14, 2012); SEC v. Bronson, 12-cv-06421-KMK (S.D.N.Y., filed
August 22, 2012). As of the date of this filing, neither case has
been resolved.
\15\ See, e.g., SEC v. Reiss, 13-cv-01537, dkt no. 10 (S.D.N.Y.
2014) (issuing a final judgment against the defendant in an
enforcement action, without the defendant admitting or denying the
allegations).
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DTC stated that the above describes, in part, the proposed
procedures filed by DTC on December 5, 2013,\16\ in response to the
Commission's opinion and order in In re International Power Group, Ltd.
(``IPWG'') directing DTC to ``adopt procedures that accord with the
fairness requirements of Section 17A(b)(3)(H).'' \17\ DTC withdrew the
proposed rule change on August 18, 2014.\18\
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\16\ See Securities Exchange Act Release No. 71132 (December 18,
2013); 78 FR 77755 (December 24, 2013) (SR-DTC-2013-11).
\17\ See Securities Exchange Act Release No. 66611 (March 15,
2012), 2012 SEC LEXIS 844 at *32 (March 15, 2012) (Admin. Proc. File
No. 3-13687).
\18\ See Securities Exchange Act Release No. 72860 (August 18,
2014), 79 FR 49825 (August 22, 2014) (SR-DTC-2013-11).
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According to DTC, as a result of its experiences following the IPWG
decision and in connection with the previous proposal, DTC has
determined that its proposed procedures for imposing Deposit Chills and
Global Locks are more appropriately directed to current trading halts
or suspensions imposed by the Commission, the Financial Industry
Regulatory Authority, Inc. (``FINRA''), or a court of competent
jurisdiction, and therefore
[[Page 62777]]
will be more effective in targeting suspected securities fraud that is
ongoing at the time the Restriction is imposed. In particular, with
respect to Deposit Chills imposed pursuant to DTC's previous
procedures, DTC believed that wrongdoers have seemingly taken into
account DTC's Restriction process, and have been avoiding it by
shortening the timeframe in which they complete their scheme, dump
their shares into the market, and move on to another issue.
Additionally, DTC stated that Global Locks were typically being
imposed on the basis of a Commission enforcement action alleging
securities law violations that had occurred in the past, and so could
not affect the violative behavior (unless the alleged securities law
violations were ongoing). According to DTC, by the time of an
enforcement action, the wrongdoers have long since transferred the
subject securities. In addition, although a Global Lock bars book-entry
settlements within DTC, it does not affect the trading of the issue,
which occurs outside of DTC.
B. Proposed Rule Change
i. Proposed Basis for the Imposition of Restrictions
Under Sections 1(a) and (b) of the proposed rule change, if either
FINRA or the Commission halts or suspends trading of an Eligible
Security, respectively, DTC would impose a Global Lock. Similarly,
under Section 1(c) of the proposed rule change, DTC would impose a
Global Lock if ordered to do so by a court of competent jurisdiction.
DTC states that its facilities should not be available to settle
transactions otherwise prohibited by the Commission, FINRA, or a court
of competent jurisdiction. DTC also stated that the imposition of a
Global Lock on an Eligible Security for which trading is halted or
suspended would prevent settlement of trades that continue despite the
halt or suspension, and prevent the liquidation of a halted or
suspended position through DTC.
Notwithstanding Sections 1(a) and (b) of the proposed rule change,
according to DTC, there may be certain limited circumstances where a
Global Lock would not further the regulatory purpose of such trading
halt or suspension. Therefore, DTC stated that if it reasonably
determines that such is the case, DTC may decline to impose a Global
Lock.
Finally, under Section 1(d) of the proposed rule change, DTC would
impose a Restriction when it becomes aware of a need for immediate
action to avert an imminent harm, injury, or other such material
adverse consequence to DTC or its Participants that could arise from
further Deposits of, or continued book-entry services with respect to,
an Eligible Security. DTC explained that, while it is impossible to
anticipate all possible scenarios that could give rise to the need for
action by DTC under Section 1(d) to avoid imminent harm, DTC does not
anticipate that it would impose Restrictions pursuant to this
formulation frequently. Examples given by DTC where this provision
could be invoked include, but are not limited to, if DTC became aware
that marketplace actors were about to deposit Securities at DTC in
connection with an ongoing corporate hijacking, market manipulation, or
in violation of other applicable laws; if an Issuer or its agent
provides DTC with plausible information that Security certificates were
stolen and were about to be deposited; or if an Issuer notifies DTC
that shares of a Security had just been issued erroneously upon a
conversion of previously satisfied notes.
ii. Proposed Basis for the Release of Restrictions
As part of DTC's process for imposing Restrictions premised on
direct court or regulatory agency intervention or the prospect of
imminent adverse consequences to DTC or its Participants, the proposed
rule change provided corresponding criteria for releasing such
Restrictions. In the case of a Global Lock imposed pursuant to Sections
1(a) and (b) of the proposed rule change (i.e., when either FINRA or
the Commission issues a trading halt or suspension, respectively), DTC
proposed that it would release the Global Lock when the halt or
suspension of trading of the Eligible Security has been lifted. In the
case of a Restriction imposed pursuant to Section 1(c) of the proposed
rule change (i.e., an order from a court of competent jurisdiction),
DTC proposed that it would release the Restriction when a court of
competent jurisdiction orders DTC to release the Restriction. DTC
explained that because trading would no longer be prohibited by FINRA,
the Commission, or a court order, there should not be any settlement
restrictions, other than those otherwise provided in the Rules.
In the case of a Restriction imposed pursuant to Section 1(d) of
the proposed rule change, DTC proposed that it would release the
Restriction when DTC reasonably determines that the release of the
Restriction would not pose a threat of imminent adverse consequences to
DTC or its Participants, obviating the original basis for the
Restriction. While DTC stated that it is impossible to anticipate all
possible scenarios that could give rise to a release of a Restriction
under this basis, DTC anticipated that it would release a Restriction
imposed pursuant to Section 1(d) of the proposed rule change in a
number of circumstances, including, without limitation, when DTC
determined that the perceived harm has passed or is significantly
remote, when the basis for the Restriction no longer exists, or when an
Eligible Security had been previously Globally Locked based on a
Commission enforcement action but there is no indication that illegally
distributed Securities are about to be deposited.
Lastly, DTC proposed that it would release a Restriction when DTC
reasonably determined that its imposition of the Restriction was based
on a clerical mistake.
iii. Proposed Fair Procedures for Notice of and Opportunity To
Challenge Restrictions
Pursuant to the proposed rule change, DTC would send written notice
(``Restriction Notice'') to the Issuer's last known business address
and to the last known business address of the Issuer's transfer agent,
if any, on record with DTC. The Restriction Notice would be sent within
three Business Days of imposition of a Restriction and would set forth
(i) the basis for the Restriction; (ii) the date the Restriction was
imposed; (iii) that the Issuer may submit a written response to DTC
detailing the basis for release of the Restriction under the proposed
rule change (``Restriction Response''); and (iv) that the Restriction
Response must be received by DTC within 20 Business Days of delivery of
the Restriction Notice. The proposed rule change also provided that, in
response to the Restriction Response, DTC may reasonably request
additional information or documentation from the Issuer.
Once the Restriction Response is received by DTC, the proposed rule
change provided that it would be reviewed by a DTC officer who did not
have responsibility for the imposition of the Restriction (``Review
Officer''). After the Review Officer completes the review, DTC would
provide a written decision (``Restriction Decision'') to the Issuer.
Within 10 Business Days of delivery of the Restriction Decision, the
Issuer may submit a ``Supplement'' for the sole purpose of establishing
that DTC made a clerical mistake or mistake arising from an oversight
or omission in reviewing the Restriction Response. If the Issuer
submits a Supplement, the Review Officer would provide a ``Supplement
Decision'' within 10
[[Page 62778]]
Business Days after the Supplement was delivered.
The proposed rule change also provided that the Restriction Notice,
the Restriction Response, the Restriction Decision, the Supplement, the
Supplement Decision, and any other documents submitted in connection
with the proposed procedures would constitute the record for purposes
of any appeal to the Commission.
Finally, the proposed rule change clarified that such Rules would
not affect DTC's ability to (i) lift or modify a Restriction; (ii)
operationally restrict book-entry services, Deposits, or other services
in the ordinary course of business, as such restrictions do not
constitute Deposit Chills or Global Locks for purposes of the proposed
rule change; (iii) communicate with the Issuer or its transfer agent or
representative, if any, provided that substantive communications are
memorialized in writing to be included in the record for purposes of
any appeal to the Commission; or (iv) send out a Restriction Notice
prior to the imposition of a Restriction.
iv. Notice of Filing of Amendment No. 1
As originally proposed, Section 3 of the proposed rule change did
not provide a specified period of time for the Review Officer to
complete the review of the Restriction Response and for DTC to issue a
Restriction Decision. DTC filed Amendment No. 1 to modify Section 3 of
the proposed rule change to provide that DTC would issue a Restriction
Decision within 10 Business Days after receiving a Restriction
Response, which may be extended for a reasonable period of time (i) if
DTC requests additional information or documents from the Issuer, or
(ii) by consent of the Issuer or the transfer agent.
III. Summary of Comments Received
The Commission received eight comment letters in response to the
proposed rule change.\19\ One comment letter generally supported the
proposed rule change.\20\ Four comment letters by two commenters, STA
and Kesner, objected to the proposed rule change.\21\ Two comment
letters from DTC responded to the objections raised by STA and
Kesner,\22\ and one comment letter did not specifically comment on any
aspect of the proposed rule change.\23\
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\19\ See supra, note 4.
\20\ See Arnoff Letter.
\21\ See STA Letters I and II, and Kesner Letters I and II.
\22\ See DTC Letters I and II.
\23\ See Deyet Letter.
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A. Supporting Comment
But for the points that are addressed in footnote 29, below, Arnoff
fully endorsed the proposed rule change, stating that the proposed fair
notice and opportunity to challenge procedures would prevent and
mitigate harm to both issuers and innocent shareholders.\24\
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\24\ See Arnoff Letter.
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B. Objecting Comments
STA and Kesner expressed general concerns with DTC, as a monopoly
in the clearance and settlement of securities, exercising discretion to
deny access to its services.\25\
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\25\ STA Letter I at 1; Kesner Letter I at 1. Commenters also
raised other points about the proposed rule change, but they did not
explain how those points render the proposed rule change
inconsistent with the Act. For example, STA stated that (i) the
proposed rule change was not a ``good faith attempt'' by DTC to
comply with IPWG, and (ii) any record could not be ``complete'' for
Commission review if the issuer does not have the ability to compel
evidence from third parties that may be the cause of DTC's concern
(STA Letter I at 3); while Kesner stated, for example, that (i)
DTC's imposition of Restrictions, in many cases, are only based upon
``flimsy legal footing, notice of commencement of an investigation
or inquiry, anecdotal observations or even unproven news stories,''
(ii) the proposed rule change does not address the ``unfortunate
results that befall innocents caught up by a [Restriction], nor the
immensity of the costs and burdens placed on issuers and investors
seeking to clear a [Restriction],'' and (iii) that the Commission
has not ``direct[ed] DTC to adopt[] rules to protect DTC or DTC's
financial institution owners and DTC has not articulated how
exercising discretionary authority satisfies its obligation for a
process.'' Kesner Letter I at 2, 3; Kesner Letter II at 1. Because
these points and other similar points made in the comment letters do
not raise a legal issue with respect to whether the proposed rule
change is consistent with the Act, they are not further summarized
in this notice and order.
In addition, commenters raised other points beyond the scope of
the proposed rule change. For example, STA stated that the proposed
rule change should also apply to transfer agents seeking initial
access to DTC's facilities (STA Letter I at 4); while Kesner stated,
for example, that (i) the Commission should not act on the proposed
rule change without (a) specific comments from major exchanges and
OTCLink regarding coordination with DTC, and (b) the Commission
concluding that DTC's actions under the proposed rule change would
not interfere with the objectives of exchanges and other regulators
and not hamper the functioning of the markets, (ii) DTC would need
to give up its immunity from lawsuits in order for there to be a
potentially fair process in the imposition and appeal of
Restrictions, (iii) investors should have standing to appeal a
Restriction, and (iv) the Commission should require DTC to undertake
a study and submit all of its statistics surrounding Restrictions.
Kesner Letter I at 4, 6; Kesner Letter II at 3. Similar to Kesner,
Arnoff asserted that the proposed rule change should clarify that
DTC should not be immune from civil liability, particularly if DTC
cannot establish that it acted in good faith and with reasonable
judgment, because DTC is not acting in a governmental capacity in
the settlement and clearance process. Arnoff Letter. Moreover,
Arnoff stated that because DTC is not infallible and the risk of
error always exists, DTC should be required to purchase ``errors and
omissions insurance'' to protect innocent issuers and investors and
to add an ``additional dimension of loss prevention.'' Arnoff
Letter. Because these points and other similar points made in the
comment letters are not germane to the proposed rule change and/or
are beyond the scope of the proposed rule change, they are not
further summarized in this notice and order.
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Proposed Basis for Imposition of Restrictions Is Vague and
Discretionary
STA stated that the proposed rule change suffers from vague,
ambiguous standards and procedural problems.\26\ Specifically, STA
asserted that the authority to impose Restrictions under Section 1(d)
of the proposed rule change is overly broad, arbitrary, permits DTC to
exercise unfettered discretion, and would allow DTC to take action
without any real evidence of the likelihood of actual harm or violation
of objective standards.\27\ STA also asserted that if DTC is concerned
about imminent adverse consequences to itself or its Participants, it
should limit its Restriction, under Section 1(d) of the proposed rule
change, to only a single ten-day period, with any ``fair process''
occurring during that ten-day Restriction.\28\ Furthermore, STA states
that, during the ten-day period, DTC could resolve concerns based on a
``misunderstanding'' or inform the Commission or FINRA of its concerns,
allowing either organization to take further action to protect DTC, its
Participants, or investors from the imminent harm.\29\
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\26\ STA Letter I at 2; see also STA Letter II at 2.
\27\ STA Letter I at 1-3; see also STA Letter II at 2.
\28\ STA Letter I at 3.
\29\ Id. at 4.
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Kesner believed that the basis for imposing Restrictions under
Sections 1(a), (b), and (c) of the proposed rule change is consistent
with the approach of DTC being directed by a regulator or court.\30\
However, similar to STA, Kesner expressed concern that Section 1(d) of
the proposed rule change would give authority to DTC to impose
Restrictions merely upon the initiation of an investigation or
enforcement proceeding where it concludes a threat is imminent
requiring immediate action.\31\ According to Kesner, DTC cannot be
``fair'' and cannot satisfy the requirements set forth in IPWG if DTC
sets its own standards and acts on its own accord to impose a
Restriction not directed by a traditional regulator or court because
DTC does not have the resources, technical expertise, or
[[Page 62779]]
``commitment to fairness'' to undertake such an expansive role in the
substantive regulation of securities Issuers or to become a ``super-
gatekeeper.'' \32\ Rather, the imposition of Restrictions would best be
left to exchanges and other ``regulatory bodies'' that have sufficient
resources and could direct DTC to impose a service restriction when
warranted.\33\ Kesner further stated that DTC's imposition of
Restrictions under Section 1(d) of the proposed rule change, if
approved, should include specific methods by which an Issuer can
successfully appeal and require DTC to remove the chill (or provide for
automatic removal after a short period) that are fair and reasonable
and that do not burden smaller Issuers with excessive costs or delays
during the denial of the DTC's essential services.\34\
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\30\ Kesner Letter I at 6.
\31\ Id.
\32\ Id. at 2, 4-5; see also STA Letter II at 3.
\33\ Kesner Letter I at 6.
\34\ Id.
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Proposed Procedures for Notice of and Opportunity To Challenge
Restrictions Are Not Fair
STA contended that Section 3, as originally proposed, of the
proposed rule change is procedurally deficient because there are no
time periods specified in the proposed rule change for the DTC Review
Officer's review to be completed. Thus, in some cases Issuers and
investors could be harmed for an indefinite period while waiting for
DTC to reach a decision.\35\ Moreover, STA expressed concern that the
Review Officer tasked with reviewing a Restriction Response may be
located in an office near the person that imposed the Restriction, may
have been involved in imposing the Restriction, and may be charged with
overturning the decision made by a colleague.\36\ Similarly, Kesner
questioned the independence of the Review Officer and asserted that
IWPG requires that appeals should be heard by parties independent of
DTC and suggests that ``representatives of the securities bar, [STA],
transfer agents, clearing and settlement firms, auditors, and business
people, under the guidance of the DTC General Counsel, should
constitute the panel of hearing officers making recommendations for
imposition and removal of [Restrictions], continuations and appeals
whenever DTC acts.'' \37\
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\35\ Id.
\36\ Id.
\37\ Kesner Letter II at 2.
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STA also asserted that notice of a Restriction should occur prior
to or, at least, contemporaneously with imposition of the Restriction,
particularly in the case of a Restriction imposed based on DTC's
assessment of imminent harm, under Section 1(d) of the proposed rule
change, not three days after the Restriction is imposed.\38\
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\38\ STA Letter I at 4.
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C. DTC's Response
Response to Comments by STA and Kesner That the Proposed Basis for
Imposition of Restrictions Is Vague and Discretionary
In response to STA's comment that the basis for imposition of
Restrictions under the proposed rule change is vague, DTC asserted that
Sections 1(a)-(c) of the proposed rule change provided objective
trigger events for imposing Restrictions and will be the primary focus
of the Restriction program going forward.\39\ DTC also stated that it
does not anticipate imposing Restrictions pursuant to Section 1(d)
frequently \40\ and has provided examples of circumstances under which
imminent harm could arise in the future as described above.\41\
Further, DTC asserted that, STA's position that the Commission should
not approve the proposed rule change if they include Section 1(d) would
deny DTC the flexibility to impose Restrictions if necessary to avoid
imminent harm to DTC or its Participants.\42\ DTC stated that it needs
the flexibility to protect itself from imminent harm that could arise
from circumstances that would neither justify nor be impacted by a
trading halt or suspension.\43\
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\39\ DTC Letter I at 2.
\40\ Id. at 2.
\41\ Id. at 3.
\42\ Id. at 2.
\43\ Id. at 3.
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In response to Kesner's comment that Section 1(d) of the proposed
rule change would give authority to DTC to impose Restrictions merely
upon the initiation of an investigation or enforcement proceeding where
it concludes a threat is imminent requiring immediate action, DTC
asserted that it is critical to the self-regulatory function of DTC to
retain discretion to avert imminent harm, including the discretion to
take action before providing notice to the Issuer, if necessary.\44\
Similarly, in response to both STA's and Kesner's comments that
Restrictions imposed under Section 1(d) of the proposed rule change
should be automatically removed after a short period or expire after 10
days, DTC stated that it would not be effective, reasonable, or
practical for it to premise its proposed rule change on the assumption
that the Commission or FINRA would or could take action quickly enough
to protect DTC, its Participants, or investors.\45\ DTC explained
further that imminent harm to DTC or its Participants could arise from
circumstances that would not be addressed by or justify a trading halt
or suspension, such as the impending deposit of illegally distributed
securities at DTC.\46\ DTC also reiterated that it does not anticipate
imposing Restrictions pursuant to Section 1(d) frequently.\47\
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\44\ DTC Letter II at 2.
\45\ DTC Letter I at 3; see also DTC Letter II at 2.
\46\ Id.
\47\ Id.
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Response to Comments by STA and Kesner That the Proposed Procedures for
Notice of and Opportunity To Challenge Restrictions Are Not Fair
In response to STA's specific claim that the proposal is
procedurally deficient because it lacks a stated time period for the
Review Officer to complete the review, DTC submitted Amendment No. 1 to
Section 3 of the proposed rule change, which, as described above,
established a ten-business-day deadline, with limited extension, for
the Review Officer to complete its review of the Restriction Response
and DTC provide a Restriction Decision.\48\
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\48\ Prior to filing Amendment No. 1, DTC also contended in its
response letter that a reasonable review by the Review Officer in a
timely manner is implicit in the proposed process, recognizing that
DTC is bound to perform a prompt review, and to do otherwise may
conflict with its obligations under Section 17A of the Act. DTC
Letter I at 4; 15 U.S.C. 78q-1.
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In response to STA's and Kesner's comments on the independence of
the Review Officer and STA's comment that notice of a Restriction
should be at least contemporaneously with the imposition of the
Restriction, DTC stated that it believes the proposed rule change is
sufficiently clear to require that the Review Officer not be conflicted
and that the Review Officer's decision would be unbiased and
independent,\49\ and that the Commission's decisions in both IPWG and
In re Atlantis Internet Group (``Atlantis'') \50\ recognize that DTC
must retain discretion to avert imminent harm, including the discretion
to take action before providing notice to the issuer, if necessary.\51\
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\49\ DTC Letter I at 4.
\50\ Atlantis, Securities Exchange Act Release. No. 75168 at 7-
8, 2015 SEC LEXIS 2394 (June 12, 2015) (Admin. Proc. File No. 3-
15432).
\51\ DTC Letter I at 3.
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[[Page 62780]]
IV. Proceedings To Determine Whether To Approve or Disapprove SR-DTC-
2016-003, as Modified by Amendment No. 1, and Grounds for Disapproval
Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \52\ to determine whether the proposed rule
change, as modified by Amendment No. 1, should be approved or
disapproved. Institution of proceedings is appropriate at this time in
view of the legal and policy issues raised by the proposed rule change.
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 change, and provide arguments
to support the Commission's analysis as to whether to approve or
disapprove the proposed rule change.
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\52\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\53\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposed rule change's consistency with the Act and the
rules thereunder. Specifically, the Commission believes that DTC's
proposed rule change raises questions as to whether it is consistent
with: (i) Section 17A(b)(3)(F) of the Act,\54\ which requires, in part,
that clearing agency rules be designed to assure the safeguarding of
securities in the custody or control of the clearing agency and, in
general, protect investors and the public interest; and (ii) Section
17A(b)(3)(H) of the Act,\55\ which requires clearing agency rules to be
in accordance with the provisions of Section 17A(b)(5)(B) of the Act,
and, in general, provide a fair procedure with respect to the
prohibition or limitation by the clearing agency of any person with
respect to access to services offered by the clearing agency.\56\
Section 17A(b)(5)(B) of the Act \57\ requires that, in any proceeding
by a registered clearing agency to determine whether a person shall be
denied participation or prohibited or limited with respect to access to
services offered by the clearing agency, the clearing agency shall
notify such person of, and give him an opportunity to be heard upon,
the specific grounds for denial or prohibition or limitation under
consideration and keep a record.\58\ A determination by the clearing
agency to deny participation or prohibit or limit a person with respect
to access to services offered by the clearing agency shall be supported
by a statement setting forth the specific grounds on which the denial
or prohibition or limitation is based.\59\
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\53\ 15 U.S.C. 78s(b)(2)(B).
\54\ 15 U.S.C. 78q-1(b)(3)(F).
\55\ 15 U.S.C. 78q-1(b)(3)(H).
\56\ 15 U.S.C. 78q-1(b)(3)(H).
\57\ 15 U.S.C. 78q-1(b)(5)(B).
\58\ Id.
\59\ Id.
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V. Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
changes to the proposed rule change as set forth in Amendment No. 1, as
well as any others they may have identified with the proposed rule
change, as amended. In particular, the Commission invites the written
views of interested persons concerning whether the proposed rule
change, as modified by Amendment No. 1, is consistent with Sections
17A(b)(3)(F) and 17A(b)(3)(H) of the Act, or any other provision of the
Act, or the rules and regulations thereunder.
Interested persons are invited to submit written data, views, and
arguments on or before October 3, 2016. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal on or
before October 17, 2016. Comments may be submitted by any of the
following methods:
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-2016-003 on the subject line.
Paper Statements
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549.
All submissions should refer to File Number SR-DTC-2016-003. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (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 the filing also will be available
for inspection and copying at the principal office of DTC and on DTCC's
Web site (http://dtcc.com/legal/sec-rule-filings.aspx). All comments
received will be posted without change; the Commission does not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to File Number SR-DTC-2016-003 and should be
submitted on or before October 3, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\60\
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\60\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-21802 Filed 9-9-16; 8:45 am]
BILLING CODE 8011-01-P