[Federal Register Volume 73, Number 246 (Monday, December 22, 2008)]
[Notices]
[Pages 78411-78412]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-30322]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59102; File No. SR-DTC-2008-11]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Approving a Proposed Rule Change To Implement a New Service To 
Allow Issuers To Track and Limit the Number of Beneficial Owners for an 
Individual CUSIP

 December 15, 2008.

I. Introduction

    On August 6, 2008, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change pursuant to Section 19(b)(1) of the Securities Exchange Act 
of 1934 (``Act'').\1\ On September 5, 2008, the Commission published 
notice of the proposed rule change in the Federal Register to solicit 
comments from interested persons.\2\ The Commission received one 
comment letter in response to the proposed rule change.\3\ For the 
reasons discussed below, the Commission is approving the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 58436 (Aug. 27, 2008), 
73 FR 51870.
    \3\ Letter from Brent Welke, CEO, Agnova Corporation (Sept. 8, 
2008).
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II. Description

    The rule change provides for the implementation of a new service 
that will allow issuers, either themselves or through an issuer-
designated administrator, to track and limit the number of beneficial 
owners of their privately transacted and closely held securities. This 
service will be called the Security Holder Tracking Service (``SH 
Tracking Service'').
    The SH Tracking Service will facilitate the book-entry settlement 
and asset servicing for securities that are privately transacted and 
closely held by providing a tool for issuers and their agents to 
monitor and limit the number and character (e.g., qualified 
institutional buyers or ``QIBs'') of beneficial owners of its 
securities (``Tracked Securities'').\4\ Although the SH Tracking 
Service was developed to address the specific concerns of Rule 144A 
securities,\5\ in practice DTC envisions that it could be utilized for 
other types of securities for which the number or character of the 
beneficial owners requires some level of control.
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    \4\ Issuers must control the number of beneficial owners 
pursuant to certain registration and reporting requirements. In 
order for issuers to be able to avoid the periodic reporting 
requirements required by the Act, they must not have more than 500 
beneficial owners. 15 U.S.C. 78l(g), 15 U.S.C. 78m(a), 15 U.S.C. 
78o(d).
    \5\ 17 CFR 230.144A.
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    The eligibility process for a Tracked Security to be made and 
remain DTC-eligible will not change from DTC's current process. 
However, under the new system, DTC will be requested in writing to set 
up a specific CUSIP for tracking such securities \6\ and will be 
notified who will perform the function of the issuer's administrator 
for the CUSIP in the SH Tracking Service.\7\ Upon receipt of all of 
such documentation, DTC will make the CUSIP DTC-eligible and will 
activate the tracking indicator on its security master file. 
Additionally, once it is made eligible, DTC will perform asset 
servicing for the issue.
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    \6\ DTC anticipates that this instruction will come from the 
underwriter at the time of the initial distribution at DTC.
    \7\ DTC anticipates that the issuer's transfer agent will serve 
as its administrator.
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    The issuer's administrator will control movements of the particular 
CUSIP for which it had been appointed. Once the tracking indicator has 
been activated on the master file and the Administrator has been 
appointed, no transfer of the securities will take place in the Tracked 
Security without the approval of the administrator through DTC's 
Inventory Management System (``IMS''). The administrator, based on 
requirements of the issuer, will be solely responsible for determining 
whether a transaction should be effected in DTC. Once approved by the 
administrator, DTC will perform centralized book-entry settlement. IMS 
will only allow an administrator access to view and approve 
transactions for CUSIPs for which it had been appointed administrator 
as reflected in DTC's records.
    Because DTC is relying solely on the instructions of the 
administrator in order to effect settlement in Tracked Securities and 
will have no knowledge of the number or character of the underlying 
beneficial owners, use of the SH Tracking Service by any party will 
constitute an agreement that DTC shall not be liable for any loss or 
damages related to the use of the SH Tracking System. Each user of the 
SH Tracking Service must agree to indemnify and hold harmless DTC and 
its affiliates from and against any and all losses, damages, 
liabilities, costs, judgments, charges, and expenses arising out of or 
relating to the use of the SH Tracking Service.
    The Tracked Securities will not be held as part of a participant's 
general free account and will not be considered eligible collateral in 
DTC's settlement system.
    To recover the costs of building the SH Tracking Service, DTC will 
add the following fees to its Fee Schedule:
     $25,000 per CUSIP for SH Tracking Services;
     $5 per delivery and receive for Tracked Securities;
     $5 per receive and delivery for reclaims of Tracked 
Securities.

III. Comment Letter

    Brent Welke, CEO of Agnova Corporation, wrote that, in the context 
of the settlement cycle, ``DTCC (sic) [should be] strictly liable for 
double ownership repercussions'' and that ``DTCC (sic) stockholders 
[should] jointly and severally guarantee DTCC obligations.'' Finally, 
Mr. Welke expressed concern about ``brokers who are facilitating share 
counterfeiting.''

[[Page 78412]]

IV. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to DTC. In particular, the Commission believes 
the proposal is consistent with Section 17A(b)(3)(F) of the Act,\8\ 
which requires that the rules of a registered clearing agency are 
designed to, among other things, promote the prompt and accurate 
clearance and settlement of securities transactions. DTC's creation of 
a service to assist issuers and their agents fulfill their regulatory 
obligations to monitor and limit the number of beneficial shareholders 
of their closely held securities should provide a meaningful incentive 
for issuers and participants to utilize DTC's depository services, 
which should provide more efficient processing of such transactions by 
reducing the incidence of physical processing outside of DTC.
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    \8\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission duly notes the importance of the issue of short 
selling that the commenter appeared to be expressing and will continue 
to monitor developments in this area and assert its oversight 
responsibilities of industry participants with the view to ensure that 
appropriate safeguards are in place to facilitate the prompt and 
accurate clearance and settlement of securities transactions and to 
protect investors. However, that issue is outside the scope and purpose 
of this proposed rule change, which is to implement a service to allow 
issuers of closely held securities to enhance their compliance with 
federal securities laws.

V. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular Section 17A of the Act \9\ and the rules and regulations 
thereunder.
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    \9\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (File No. SR-DTC-2008-11) be and 
hereby is approved.\11\
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    \10\ 15 U.S.C. 78s(b)(2).
    \11\ 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.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-30322 Filed 12-19-08; 8:45 am]
BILLING CODE 8011-01-P