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Self-Regulatory Organizations; the Depository Trust Company; Order Approving a Proposed Rule Change Relating to the Establishment of a Matured Book-Entry Only Certificate Destruction Service

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Information about this document as published in the Federal Register.

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Start Preamble April 10, 2001.

On October 25, 1999, the Depository Trust Company (“DTC”) filed with the Securities and Exchange Commission (“Commission”) a proposed rule change (File No. SR-DTC-99-6) pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”).[1] Notice of the proposal was published in the Federal Register on June 15, 2000.[2] No comment letters were received. For the reasons discussed below, the Commission is approving the proposed rule change.

I. Description

Prior to this rule change, shortly before a debt security held by DTC matures, DTC sends to the redemption agent: [3] (i) A DTC “letter of transmittal;” (ii) a DTC “redemption payment summary form;” and (iii) the certificate(s) that represent the maturing issue. This procedure is in place for issues that are evidenced both by non-engraved certificates which are typically book entry only (“BEO”) securities [4] and by engraved certificates. DTC then removes the security certificate(s) from its vault and delivers the certificate(s) to a commercial courier service that in turn delivers the certificates to the redemption agent. There, the certificates are processed in accordance with the redemption agent's individual policies and practices.[5]

Under DTC's rule change, DTC will offer a new optional service to Start Printed Page 19593redemption agents under which DTC will destroy BEO certificates in lieu of shipping the certificates to the redemption agent.[6] Redemption agents that wish to use this new service will deliver to DTC an executed “matured BEO certificate destruction request.” [7] DTC will continue to present the DTC “letter of transmittal” and the DTC “redemption payment summary form” but not the BEO certificate(s) to the redemption agent in advance of the issue's maturity. In addition, DTC will present to the redemption agent a “notice of destruction” [8] stating that DTC intends to destroy the BEO certificate(s) in accordance with the procedures set forth in this rule filing as they may be amended from time to time. If the redemption agent requests in writing in a timely manner that DTC not destroy the certificates, DTC will honor the redemption agent's request.

The matured BEO security certificates will be physically destroyed on DTC's premises only after: (i) DTC has received the redemption proceeds in full and (ii) an additional thirty days have passed after DTC receives such proceeds. Authorized DTC personnel will oversee and witness the destruction of the cancelled certificates. DTC will maintain detailed ledger control over the BEO certificates through the point of destruction. An accurate record of all canceled certificates will be maintained and will be searchable by date of cancellation. Prior to destruction, the maturing BEO security certificates will be microfilmed or imaged by DTC. DTC will retain the microfilm or computer images of these BEO certificates for ten years following destruction of the certificates, and for the first six months, DTC will maintain the microfilm or computer images in a place that is easily accessible by authorized DTC personnel.[9] Copies of the microfilm (at no fee) or eventually images (at a fee) will be available to the redemption agent during the ten years following destruction. DTC will be liable for gross negligence and willful misconduct.

As a result of this new service, such BEO security certificates, once deposited in DTC, will never have to be physically removed from DTC's vault. They will be maintained in a secure location that does not allow access to the public or unauthorized personnel. Additionally, by centralizing the destruction of matured BEO debt security certificates, DTC will provide uniform and consistent controls and procedures (as well as physical safeguards) for all such certificates in the U.S. capital market.

II. Discussion

Section 17A(b)(3)(F)[10] of the Act requires the rules of a clearing agency be designed to assure the safeguarding of securities which are in the clearing agency's custody or control or for which it is responsible. The Commission believes that DTC's rule change is consistent with DTC's obligation under the Act because the new procedures will help to reduce the risks currently associated with the processing of matured BEO certificates by eliminating much of the physical handling currently involved in processing BEO certificates. In addition, the Commission believes that DTC's BEO certificate destruction policy contains sufficient safeguards concerning the selection of BEO certificates that will be destroyed, the oversight of the destruction, and the recordkeeping of destroyed BEO certificates.

III. 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 and the rules and regulations thereunder.

It Is Therefore Ordered, pursuant to section 19(b)(2) of the Act, that the proposed rule change (File No. SR-DTC-99-6) be, and hereby is, approved.

Start Signature

For the Commission by the Division of Market Regulation, pursuant to delegated authority.[11]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble


2.  Securities Exchange Act Release No. 42912 (June 8, 2000), 65 FR 37585.

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3.  For the majority of maturing debt securities, the transfer agent is also the redemption agent. Sometimes the issuer itself will serve as the redemption agent or will appoint a third party other than the transfer agent to serve as the redemption agent.

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4.  A BEO security is represented by a paper certificate held in a securities depository while all transactions relating to that security are completed electronically. Beneficial owners of BEO securities generally cannot obtain a paper certificate evidencing their ownership interests in BEO securities, and certificates are generally not moved outside the depository. This format is widely used for many debt securities.

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5.  Historically, some agents have contracted with commercial vendors for the physical destruction of such certificates.

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6.  At this time, DTC will offer this service only for non-engraved BEO certificates.

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7.  A copy of the “matured BEO certificate destruction request” is set forth as Exhibit B of DTC's proposed rule change, which is available through the Commission's Public Reference Branch or through DTC.

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8.  A copy of the “notice of destruction” is set forth in Exhibit C of DTC's proposed rule change, which is available through the Commission's Public Reference Room or through DTC.

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9.  DTC has informed the Commission's staff that for the time period that such microfilm or imaged records must be maintained, whether by DTC or by a third party on behalf of DTC, such records will: (i) Be available at all times for examination by the Commission and the appropriate regulatory agency for immediate, easily readable projection/enlargement; (ii) be arranged and indexed in a manner that permits immediate location of any particular record; (iii) be immediately provided upon request by the Commission or appropriate regulatory agency; and (iv) be copied and stored separately from the original records.

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10.  15 U.S.C. 78q-1(b)(3)(F).

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[FR Doc. 01-9339 Filed 4-13-01; 8:45 am]