

[Federal Register: August 16, 2006 (Volume 71, Number 158)]
[Notices]               
[Page 47262-47264]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16au06-139]                         


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54290; File No. SR-Amex-2006-40]

 
Self-Regulatory Organizations; American Stock Exchange LLC; Order 
Granting Approval of a Proposed Rule Change Relating to Direct 
Registration System Eligibility Requirements

August 8, 2006.

I. Introduction

    On April 28, 2006, the American Stock Exchange LLC (``Amex'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-Amex-2006-40 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 7, 2006.\2\ Two comment 
letters were received.\3\ For the reasons discussed below, the 
Commission is granting approval of the proposed rule change.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 53911 (May 31, 2006), 71 
FR 33009 (June 7, 2006) [File No. SR-Amex-2006-40].
    \3\ Letters from Noland Cheng, Chairman, SIA Operations 
Committee, Securities Industry Association (June 27, 2006) and Paul 
Conn, President, Global Capital Markets, Computershare Limited, and 
Charlie Rossi, Executive Vice President, Computershare Investor 
Services (July 28, 2006).
    \4\ Concurrent with the Commission's approval of NYSE's rule 
change, the Commission is also approving in separate orders similar 
rule changes proposed by the New York Stock Exchange LLC (``NYSE'') 
and The NASDAQ Stock Market LLC (``Nasdaq''). Securities Exchange 
Act Release Nos. 54289 (August 8, 2006) [File No. SR-NYSE-2006-29] 
and 54288 (August 8, 2006) [File No. SR-NASDAQ-2006-008]. The 
Commission has also published notice of a similar rule changed 
proposed by NYSE Arca, Inc. Securities Exchange Act Release No. 
54126 (July 11, 2006), 71 FR 40768 (July 18, 2006) [File No. SR-
NYSEArca-2006-31].
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II. Description

    The Direct Registration System (``DRS'') allows an investor to 
establish either through the issuer's transfer agent or through the 
investor's broker-dealer a book-entry position on the books of the 
issuer and to electronically transfer her position between the transfer 
agent and the broker-dealer of her choice through a facility currently 
administered by The Depository Trust Company (``DTC'').\5\ DRS, 
therefore, enables an investor to have securities registered in her 
name without having a securities certificate issued to her and to 
electronically transfer her securities to her broker-dealer in order to 
effect a transaction without the risk and delays associated with the 
use of securities certificates.
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    \5\ Currently, the only registered clearing agency operating a 
DRS is DTC. For a detailed description of DRS and the DRS facilities 
administered by DTC, see Securities Exchange Act Release Nos. 37931 
(November 7, 1996), 61 FR 58600 (November 15, 1996), [File No. SR-
DTC-96-15] (order granting approval to establish DRS) and 41862 
(September 10, 1999), 64 FR 51162 (September 21, 1999), [File No. 
SR-DTC-99-16] (order approving implementation of the Profile 
Modification System).
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    Investors holding their securities in DRS retain the rights 
associated with securities certificates, including such rights as 
control of ownership and voting rights, without having the 
responsibility of holding and safeguarding securities certificates. In 
addition, in corporate actions such as reverse stock splits and 
mergers, cancellation of old shares and issuance of new shares are 
handled electronically with no securities certificates to be returned 
to or received from the transfer agent.
    In order to reduce the number of transactions in securities for 
which settlement is effected by the physical delivery of securities 
certificates and thereby reduce the risks, costs, and delays associated 
with the physical delivery of securities certificates, Amex is amending 
its listing requirements to add new Rule 778 to its Rules and new 
Section 135 to its Company Guide.\6\ These provisions will require 
certain listed companies to make their securities eligible for a DRS 
operated by a securities depository.\7\ Specifically, Amex's rule 
change will require (i) all securities (other than the securities 
identified below) initially listing on Amex on or after January 1, 
2007, to be eligible for a DRS and (ii) all securities (other than the 
securities identified below) listed on Amex on and after January 1, 
2008, to be eligible for a DRS. The initial listing requirement set 
forth in (i) above will not apply to securities of issuers that already 
have securities listed on the Amex, securities of issuers that 
immediately prior to such initial Amex listing had securities listed on 
another national securities exchange, derivative products,\8\ or 
securities (other than stocks) which are book-entry-only. The ongoing 
listing requirement set forth in (ii) above will not apply to 
derivative products or securities (other than stocks) which are book-
entry-only.
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    \6\ The exact text of the Amex proposed rule change is set forth 
in its filing, which can be found at http://www.amex.com.

    \7\ The term ``securities depository'' is defined as a 
securities depository registered as a clearing agency under Section 
17A(b)(2) of the Act. See note 5.
    \8\ As defined in Article 1, Section 3(d) of Amex's 
Constitution, the term ``derivative products'' includes in addition 
to standardized options, other securities which are issued by The 
Options Clearing Corporation or another limited purpose entity or 
trust and which are based solely on the performance of an index or 
portfolio of other publicly traded securities. The term ``derivative 
products'' does not include warrants of any type or closed-end 
management investment companies.
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III. Comment Letters

    The Commission received two comment letters in support of the 
proposed rule change.\9\ The SIA Operations Committee (``SIA''), an 
industry organization representing broker-dealers, stated that the 
effect of the proposed rule change will be to reduce significantly the 
number of transactions in securities for which settlement is effected 
by the physical delivery of securities certificates thereby reducing 
costs, risks, and delays associated with physical settlement. The SIA 
also contended that by increasing the number of DRS-eligible 
securities, the proposed rule change is an important step in reducing 
the number physical certificates, a goal the SIA has long supported in 
its efforts to promote immobilization and dematerialization.
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    \9\ Supra note 3. The SIA and Computershare's comment letters 
were written in support of the three similar proposed rule changes 
filed by Amex, Nasdaq, and NYSE. Supra note 4. The NYSE Arca's 
proposed rule change was noticed by the Commission subsequent to the 
date the commenters submitted their comment letters.
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    Computershare, a registered transfer agent, stated that the 
proposed rule change will help immobilize and eventually dematerialize 
certificates in the U.S. market, which it believes will result in 
benefits such as cost savings, increased efficiency, more accurate and 
timely trade settlements, and reduced risk of loss for investors. 
Computershare noted however that some challenges remain to be overcome 
in the broker-dealer community before these benefits can be realized. 
For example, Computershare contended, among other things, that broker-
dealers are not sufficiently educating their employees or their 
customers about the inherent risks associated with owning certificates 
or the benefits of owning in DRS. In addition, Computershare stated 
that certain current industry processing practices also need to be 
changed. Specifically, it believes that the industry should ``default 
to DRS,'' a process whereby customers of broker-dealers would obtain 
only a statement of their positions held on the issuer's records rather 
than a certificate unless the customer contacted the issuer's transfer 
agent directly to obtain a certificate. Computershare urged the 
Commission to review and modify current regulation to address these 
issues.

IV. Discussion

    Section 6(b)(5) of the Act requires, among other things, that the 
rules of an

[[Page 47263]]

exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public 
interest.\10\ For the reasons described below, the Commission finds 
that the rule change is consistent with Section 6(b)(5) of the Act.
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    \10\ 15 U.S.C. 78f(b)(5).
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    The use of securities certificates has long been identified as an 
inefficient and risk-laden mechanism by which to hold and transfer 
ownership.\11\ Because securities certificates require manual 
processing, their use can result in significant delays and expenses in 
processing securities transactions and present the risk of certificates 
being lost, stolen, or forged. Many of these costs and risks are 
ultimately borne by investors.\12\ Congress has recognized the problems 
and dangers that the use of certificates presents to the safe and 
efficient operation of the U.S. clearance and settlement system and has 
given the Commission responsibility and authority to address these 
issues.\13\
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    \11\ Securities Exchange Act Release No. 49405 (March 11, 2004), 
69 FR 12922 (March 18, 2004), [File No. S7-13-04] (Securities 
Transaction Settlement Concept Release).
    \12\ Id.
    \13\ 15 U.S.C. 78q-1(a)(2)(A). Congress expressly envisioned the 
Commission's authority to extend to all aspects of the securities 
handling process involving securities transactions within the United 
States, including activities by clearing agencies, depositories, 
corporate issuers, and transfer agents. See S. Rep. No. 75, 94th 
Cong., 1st Sess. at 55 (1975).
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    Consistent with its Congressional directives, in its efforts to 
improve efficiencies and decrease risks associated with processing 
securities transactions, the Commission has long advocated a reduction 
in the use of certificates in the trading environment by immobilizing 
or dematerializing securities and has encouraged the use of 
alternatives to holding securities in certificated form. Among other 
things, the Commission has approved the rule filings of self-regulatory 
organizations that require their members to use the facilities of a 
securities depository for the book-entry settlement of all transactions 
in depository-eligible securities \14\ and that require any security 
listed for trading must be depository eligible if possible.\15\ More 
recently the Commission has approved the implementation and expansion 
of DRS.\16\
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    \14\ Securities Exchange Act Release No. 32455 (June 11, 1993), 
58 FR 33679 (June 18, 1993)(order approving rules requiring members, 
member organizations, and affiliated members of the New York Stock 
Exchange, National Association of Securities Dealers, American Stock 
Exchange, Midwest Stock Exchange, Boston Stock Exchange, Pacific 
Stock Exchange, and Philadelphia Stock Exchange to use the 
facilities of a securities depository for the book-entry settlement 
of all transactions in depository-eligible securities with another 
financial intermediary).
    \15\ Securities Exchange Act Release No. 35798 (June 1, 1995), 
60 FR 30909 (June 12, 1995), [File Nos. SR-Amex-95-17; SR-BSE-95-09; 
SR-CHX-95-12; SR-NASD-95-24; SR-NYSE-95-19; SR-PSE-95-14; SR-PHLX-
95-34] (order approving rules setting forth depository eligibility 
requirements for issuers seeking to have their shares listed on the 
exchange).
    \16\ In 1996, the NYSE modified its listing criteria to permit 
listed companies to issue securities in book entry form provided 
that the issue is included in DRS. Securities Exchange Act Release 
No. 37937 (November 8, 1996), 61 FR 58728 (November 18, 1996), [File 
No. SR-NYSE-96-29]. Similarly, the NASD modified its rule to require 
that if an issuer establishes a direct registration program, it must 
participate in an electronic link with a securities depository in 
order to facilitate the electronic transfer of the issue. Securities 
Exchange Act Release No. 39369 (November 26, 1997), 62 FR 64034 
(December 3, 1997), [File No. SR-97-51]. On July 30, 2002, the 
Commission approved a rule change proposed by the NYSE to amend 
Section 501.01 of the NYSE Listed Company Manual to allow a listed 
company to issue securities in a dematerialized or completely 
immobilized form and therefore not send stock certificates to record 
holders provided the company's stock is issued pursuant to a 
dividend reinvestment program, stock purchase plan, or is included 
in DRS. Securities Exchange Act Release No. 46282 (July 30, 2002), 
67 FR 50972 (August 6, 2002), [File No. SR-NYSE-2001-33].
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    While the U.S. markets have made great progress in immobilization 
and dematerialization for institutional and broker-to-broker 
transactions, many industry representatives believe that the small 
percentage of securities held in certificated form (mostly by retail 
customers of broker-dealers) impose unnecessary risk and 
disproportionately large expense to the industry and to investors. In 
an attempt to address this issue, Amex's rule change, along with those 
of the NYSE and Nasdaq, should help expand the use of DRS. As a result, 
risks, costs, and processing inefficiencies associated with the 
physical delivery of securities certificates should be reduced, and the 
perfection of the national market system should be promoted. 
Additionally, those investors holding securities in listed securities 
covered by the rule change that decide to hold their securities in DRS 
should realize the benefits of more accurate, quicker, and more cost-
efficient transfers; faster distribution of sale proceeds; reduced 
number of lost or stolen certificates and a reduction in the associated 
certificate replacement costs; and consistency of owning in book-entry 
across asset classes.
    The Commission realizes that some issuers and transfer agents may 
bear expenses related to complying with the rule change. In order to 
make a security DRS-eligible, issuers of listed companies must have a 
transfer agent which is a DRS Limited Participants.\17\ In order to 
make an issue DRS-eligible, issuers may need to amend their corporate 
governing documents to permit the issuance of book-entry shares. The 
Commission believes, however, that the long-term benefits of increased 
efficiencies and reduced risks afforded by DRS outweigh the costs that 
some issuers and transfer agents may incur. Furthermore, the time 
frames built into the proposal should allow issuers sufficient time to 
make any necessary changes to comply with the rule change.
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    \17\ For a description of DTC's rules relating to DRS Limited 
Participants, see Securities Exchange Act Release Nos. 37931 and 
41862. Supra note 5.
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    While the propose rule change should significantly reduce the 
number of transactions in securities for which settlement is effected 
by the physical delivery of securities certificates, the proposed rule 
change will not eliminate the ability of investors to obtain securities 
certificates after the settlement of securities transactions provided 
the issuer has chosen to issue certificates. Such investors can 
continue to contact the issuer's transfer agent, either directly or 
through their broker-dealer, to obtain a securities certificate.
    Accordingly, for the reasons stated above the Commission finds that 
the rule change is consistent with Amex's obligation under Section 6(b) 
of the Act to foster cooperation and coordination with persons engaged 
in regulating, clearing, settling, processing information with respect 
to, and facilitating transactions in securities, to remove impediments 
to perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest.

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 with the requirements of Section 6(b)(5) 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-Amex-2006-40) be and hereby 
is approved.
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    \18\ 17 CFR 200.30-3(a)(12).


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    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\18\
Nancy M. Morris,
Secretary.
 [FR Doc. E6-13401 Filed 8-15-06; 8:45 am]

BILLING CODE 8010-01-P
