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Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to Modifications to the Existing Operational Arrangements

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Start Preamble May 29, 2002.

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),[1] notice is hereby given that on February 26, 2002, The Depository Trust Company (“DTC”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I, II, and III below, which items have been prepared primarily by DTC. The Commission is publishing this notice to Start Printed Page 39453solicit comments on the proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

The proposed rule change consists of modifications to the existing Operational Arrangements necessary for a securities issue to become eligible for the services of DTC. These updated operational arrangements are set forth in a document entitled “Operational Arrangements (Necessary for an Issue to Become and Remain Eligible for DTC Services)” dated February 2002.

II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, DTC included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. DTC has prepared summaries, set forth in sections (A), (B), and (C) below, of the most significant aspects of such statements.[2]

(A) Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

DTC's Operational Arrangements memorandum was first published in June 1987. It was then updated in June 1988, in February 1992, in December 1994, and most recently in January 1998.[3] The purpose of this proposed rule change is to update DTC's issue eligibility requirements. In particular, the arrangements now expand use of blanket letters of representation (“BLORs”).

DTC's Operational Arrangements are designed to maximize the number of issues that can be made eligible while ensuring orderly processing and timely payments to participants. DTC's experience demonstrates that when issuers, underwriters, and their counsel are aware of DTC's requirements, those requirements can be met almost without exception.[4]

The most significant difference between the new Operational Arrangements and the Operational Arrangements currently in effect is DTC's expansion of the use of BLORs to cover corporate book-entry-only (“BEO”) issues.

In the interest of providing some background, DTC made eligible 181,599 CUSIPs last year, approximately 90% of which were BEOs. All BEO issues were covered by either a letter of representation (“LOR”) or in the case of some municipal issues a BLOR. LORs often cover multiple CUSIPs.

In 1998, DTC first introduced the use of an issuer BLOR on an optional basis for all municipal issues.[5] An issuer needs to submit a BLOR only once to DTC for all issues. This eliminates the need to submit individual LORs each time the issuer wishes to distribute securities of a type for which DTC requires an LOR.[6] These modified arrangements now extend the use of BLORs to corporate issues.

DTC's experience with BLORs in municipal issues has been quite encouraging. In 2001, 85% of all municipal BEO issues that were made DTC-eligible were covered by BLORs. This past year, 2,330 new BLORs were filed for municipals and an additional 12,138 issues were covered by existing BLORs [7] while 2,550 issues were covered by individual LORs.

DTC estimates somewhat conservatively that the cost to the industry in legal fees and delivery costs related to each individual LOR approximates $250 per LOR. Even on the basis of such a conservative estimate, the savings to the industry last year alone resulting from DTC making the blanket letter process available to the 14,468 municipal issues for which it was used exceeded $3.6 million.

In contrast 4,533 individual corporate LORs were submitted last year to cover corporate issues. DTC now wishes to extend BLOR savings and efficiencies to corporate BEO issues that are DTC-eligible.

The proposed rule change is consistent with the requirements of Section 17A of the Act and the regulations thereunder because it promotes efficiencies in the clearance and settlement of securities transactions. It will expedite the process of making securities eligible for DTC's services and will reduce risks and associated costs to DTC participants.

(B) Self-Regulatory Organization's Statement on Burden on Competition

DTC does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act, in the public interest, and for the protection of investors.

(C) Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others

Written comments from DTC's participants have not been solicited nor received on the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

The foregoing rule change has become effective pursuant to section 19(b)(3)(A)(iii) of the Act [8] and Rule 19b-4(f)(4) [9] promulgated thereunder because the proposal effects a change in an existing service of DTC that (A) does not adversely affect the safeguarding of securities or funds in the custody or control of DTC or for which it is responsible and (B) does not significantly affect the respective rights or obligations of DTC or persons using the service. At any time within sixty days of the filing of the proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Start Printed Page 39454Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 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 inspection and copying in the Commission's Public Reference Section, 450 Fifth Street, NW., Washington, DC 20549. Copies of such filing will also be available for inspection and copying at the principal office of the DTC. All submissions should refer to the File No. SR-DTC-2002-02 and should be submitted by June 28, 2002.

Start Signature

For the Commission by the Division of Market Regulation, pursuant to delegated authority.[10]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble


2.  The Commission has modified parts of these statements.

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3.  Securities Exchange Act Release Nos. 24818 (August 19, 1987), 52 FR 31833 [File No. DTC-87-10]; 25948 (July 27, 1988), 53 FR 29294 [File No. DTC-88-13]; 30625 (April 23, 1992), 57 FR 18534 [File No. DTC-92-06]; 35649 (April 26, 1995), 60 FR 21576 [File No. DTC-94-19]; and 39894 (April 21, 1998), 63 FR 23310 [File No. DTC-97-23].

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4.  In 2001 a total of 181,599 new issues (CUSIPs) were made eligible for DTC's services, representing over 99% of all new issues submitted to DTC's Underwriting Department for eligibility determinations during the year. These figures include equity, corporate debt, municipal debt, and U.S. Government and Agency securities. In the unusual circumstance in which the processing characteristics of a new issue that is being structured would not meet DTC's Operational Arrangements, if contacted early enough in the planning process DTC staff is often able to assist in suggesting restructuring alternatives that would permit the issue to be made eligible at the depository.

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5.  Securities Exchange Act Release No. 39894 (April 21, 1998), 63 FR 23310 [File No. DTC-97-23].

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6.  DTC undertakes to make available to issuers that execute BLORs any future modifications in the Operational Arrangements through publication on DTC's website at Upon review, issuers will have the opportunity to withdraw their BLORs.

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7.  As of end-of-year 2001, 22,603 municipal issuers had filed BLORs with DTC since 1998 to cover their issues.

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8.  15 U.S.C. 78s(b)(3)(A)(iii).

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[FR Doc. 02-14301 Filed 6-6-02; 8:45 am]