[Federal Register Volume 85, Number 234 (Friday, December 4, 2020)]
[Notices]
[Pages 78371-78381]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-26676]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90534; File No. SR-DTC-2020-017]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of Proposed Rule Change to Allow for the Deposit of 
Electronic Certificates of Deposit and Technical Changes

November 30, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 78372]]

(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 20, 2020, 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 by the clearing agency. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change \3\ consists of amendments to the 
Procedures \4\ of DTC. Specifically, the proposed rule change would 
amend the OA and Underwriting Service Guide to implement a new 
application and secured electronic vault (``E-vault'') for requests for 
eligibility, execution, Delivery and storage of certificates of deposit 
(``CDs'') that are issued by state and federal chartered banks that are 
Eligible Securities \5\ in electronic form. Technical changes with 
respect to spelling, punctuation and spacing of text would also be 
made. The use of the new application and E-vault would replace an 
existing legacy platform and paper-based model for Delivery and storage 
of CDs maintained in DTC's secured physical vault, as more fully 
described below.
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    \3\ Capitalized terms not defined herein are defined in the 
Rules, By-Laws and Organization Certificate of DTC (the ``Rules''), 
available at www.dtcc.com/~/media/Files/Downloads/legal/rules/
dtc_rules.pdf, the DTC Operational Arrangements (Necessary for 
Securities to Become and Remain Eligible for DTC Services) (``OA''), 
available at http://www.dtcc.com/~/media/Files/Downloads/legal/
issue-eligibility/eligibility/operational-arrangements.pdf, and the 
DTC Underwriting Service Guide (``Underwriting Service Guide''), 
available at http://www.dtcc.com/~/media/Files/Downloads/legal/
service-guides/Underwriting-Service-Guide.pdf.
    \4\ The OA and the Underwriting Service Guide constitute 
Procedures of DTC. Pursuant to the Rules, the term ``Procedures'' 
means the Procedures, service guides, and regulations of DTC adopted 
pursuant to Rule 27, as amended from time to time. See Rule 1, 
Section 1, supra note 3. DTC's Procedures are filed with the 
Commission. They are binding on DTC and each Participant in the same 
manner as they are bound by the Rules. See Rule 27, supra note 3. 
The OA is also binding on each issuer and agent of an Eligible 
Security. See OA, supra note 3 at 5, supra note 3. DTC also 
maintains service guides that constitute Procedures relating to 
services it offers. Available at http://www.dtcc.com/legal/rules-and-procedures?subsidiary=DTC&pgs=1.
    \5\ Generally, Eligible Securities must have been issued in a 
transaction (i) registered with the Commission pursuant to the 
Securities Act; (ii) exempt from registration pursuant to a 
Securities Act exemption without transfer or ownership restrictions; 
or (iii) pursuant to Rule 144A, 17 CFR 230.144A, or Regulation S, 17 
CFR 230.901-230.905, under the Securities Act. See OA, supra note 3 
at 2-3.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency 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. The clearing agency has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    The proposed rule change of DTC would amend the Procedures of DTC. 
Specifically, the proposed rule change would amend the OA and 
Underwriting Service Guide to implement a new application and secured 
E-vault for requests for eligibility, execution, Delivery and storage 
of CDs that are (i) Eligible Securities and (ii) issued by state and 
federal chartered banks in electronic form. The use of the new 
application and E-vault would replace an existing legacy platform for 
Delivery and storage of CDs maintained in DTC's secured physical vault, 
as more fully described below.
Background
    DTC (i) makes eligible for Deposit, processes and holds physical 
retail CDs issued by various U.S. banks and Deposited by Participants 
and (ii) credits interests in those CDs to Participant's Securities 
Accounts.\6\ As described below, the use of physical certificates 
presents operational concerns to Participants and to DTC and DTC has 
undertaken efforts to promote dematerialization of Securities. To 
address operational concerns relating to processing of physical CDs, 
DTC has developed a system that would eliminate the need for physical 
certificates for certain issue types of CDs by allowing them to be 
issued and held in electronic form, as described below.
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    \6\ See OA, supra note 3, at 9-10.
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    Upon implementation, the proposed rule change would address 
operational concerns of Participants relating to the amount of time and 
manual effort currently required for the issuance and redemption of 
physical CDs by allowing for a fully electronic process for the 
execution and Delivery of the affected CD certificates. As such, the 
proposed rule change would also reduce the need for DTC to (i) perform 
manual processing relating to CD Deposits and (ii) reserve space in its 
secure physical vault currently used for CDs by allowing for the 
storage of CDs in electronic form in a secure E-vault.
    The proposed electronic process would also address concerns 
relating to potential disruptions in the physical transport of paper 
CDs to DTC currently made using courier and overnight delivery 
services. Such disruptions may be caused by weather-related issues, 
such as Superstorm Sandy which impacted physical securities processing 
in 2012, and other previously unforeseen circumstances, such as the 
COVID-19 pandemic. Although, DTC has been able to maintain securities 
eligibility and processing operations during such circumstances, 
including by utilizing a letter of securities possession \7\ (``LOP'') 
process that enables DTC to accept Delivery of securities represented 
in physical form even if the circumstances prevent physical delivery at 
that time, such disruptions could delay the Deposit of CDs and impact 
the timely closing of issuances and otherwise affect liquidity in the 
marketplace for CDs.
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    \7\ See Underwriting Service Guide, supra note 3 at 17.
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Current DTC Eligibility Process for CDs
    Only Participants can request that DTC make a Security eligible for 
Deposit.\8\ It is therefore incumbent on an issuer to have a 
relationship with an underwriter or other financial institution that is 
a Participant, or is directly associated with a Participant, that is 
willing to sponsor the eligibility process for the issuer's 
Securities.\9\ A Participant may submit a Deposit eligibility request 
for a CD through the underwriting services of DTC at the time a 
security is initially being offered and distributed to the marketplace 
or at a later time for already issued and outstanding securities.\10\
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    \8\ See id. at 1.
    \9\ Id.
    \10\ Id.
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    Participants must provide an eligibility request for the specified 
securities to Underwriting by submitting all required issuer and 
securities data and all related offering documents, at a minimum, 
through the online Securities Origination, Underwriting and Reliable 
Corporate Action Environment (``UW SOURCE'') system.\11\
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    \11\ Id. at 2.
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    CDs are book entry-only (``BEO'') Securities \12\ registered to 
DTC's

[[Page 78373]]

nominee, Cede & Co. BEO Securities are DTC-eligible Securities for 
which (i) physical certificates are not available to investors and (ii) 
DTC, through its nominee, Cede & Co., will hold the entire balance of 
the offering, either at DTC (in physical form) or through a FAST Agent 
in DTC's Fast Automated Securities Transfer (``FAST'') program. Issuers 
of BEO Securities must submit to DTC a Letter of Representations 
(``LOR'') among the issuer, its agent (as applicable) and DTC, prior to 
such issue being determined to be eligible. For corporate and municipal 
securities, there are two acceptable forms of LOR: A Blanket Issuer 
Letter of Representations (``BLOR'') or an Issuer Letter of 
Representations (``ILOR''). A BLOR is issuer specific and applicable to 
all DTC-eligible securities (debt and/or equity) of the same issuer. 
Once a BLOR is on file for an issuer, a new BLOR is not required for 
future issuances unless the issuer's name changes (in which case an 
opinion of counsel may also be required). An ILOR may be used for 
discrete issuances, and is applicable only to that issue of securities, 
such as trust issuances. Each issuer of a BEO Security must submit to 
DTC a fully executed LOR on DTC's preprinted form. This LOR represents 
the issuer's agreement to comply with the requirements set forth in the 
OA, as amended from time to time.\13\
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    \12\ Id. at 4.
    \13\ Id.
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    Once DTC has determined to make a Security eligible, a Participant 
may Deposit the Security at DTC for crediting to its Securities 
Account. For a CD issuance, the issuing bank and Depositing Participant 
must coordinate the execution and Delivery of the physical certificate 
to DTC in order for the Participant to timely receive credit by the 
anticipated closing date.\14\ Once DTC receives an acceptable Deposit 
of an eligible CD from a Participant, DTC credits a Security 
Entitlement \15\ in the CD to the Participant's Securities Account \16\ 
and DTC holds the original paper certificate in its secure vault for 
the duration of the term of the CD.
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    \14\ See DTC Deposits Service Guide (``Deposits Guide''), 
available at http://www.dtcc.com/~/media/Files/Downloads/legal/
service-guides/Deposits.pdf, at 8. The closing date is the date on 
which Underwriting will distribute an issue to the underwriter's 
Participant account at DTC for book-entry delivery and settlement 
upon notification by both the underwriter and the issuer that an 
issue has closed (i.e., the distribution date). See Underwriting 
Guide, supra note 3, at 6. On the closing date, when an issuer or 
its agent and the underwriter confirm with DTC that the issue has 
closed and verifies pertinent data, DTC releases the position from 
an internal DTC account and credits the underwriter's Participant 
account, provided that DTC received the certificates. See id. at 9.
    \15\ Pursuant to Rule 1, the term ``Security Entitlement'' has 
the meaning given to the term ``security entitlement'' in Section 8-
102 of the New York Uniform Commercial Code (``NYUCC''). See Rule 1, 
supra note 3. See also NYUCC 8-102. The interest of a Participant or 
Pledgee in a Security credited to its Account is a Security 
Entitlement. See Rule 1, supra note 3.
    \16\ See Deposits Guide, supra note 14, at 8.
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Proposal
    Pursuant to the proposed rule change, DTC is proposing to launch a 
new program to support Deposit of electronic CDs that would be issued 
by banks (``E-CDs''). The program would allow E-CDs to be 
electronically generated, signed, delivered to DTC and held in 
electronic form in a secure E-vault.
    Upon implementation of the proposed rule change, CDs of state and 
federally chartered banks containing certain standard terms that 
conform to one of four proposed templates (``System E-CD Templates'') 
would be eligible for the new program, as described below. The System 
E-CD Templates were developed with input from DTC Participants that act 
as underwriters of CD. The templates would cover four basic types of 
CDs, specifically (i) Fixed Rate Non-Callable, (ii) Fixed Rate 
Callable, (iii) Step Rate Non-Callable and (iv) Step Rate Callable.\17\
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    \17\ A Fixed Rate CD pays a fixed interest rate over the entire 
term of the CD. A Step Rate CD allows for increases in the interest 
rate at specific, intervals that are pre-defined by the issuer. A 
Callable CD contains a call feature that gives the issuing bank the 
ability to redeem the CD prior to its stated maturity, usually 
within a given time frame and at a preset call price as set forth in 
the ``call provision'' in the master certificate. A certificate 
without such a provision cannot not be called by the issuer prior to 
maturity date (Non-Callable).
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    After implementation, in order to facilitate needs of issuers and 
underwriters, DTC may, at its own discretion, (i) edit the System E-CD 
Templates and/or (ii) add additional templates for use in the E-CD 
program as published via Important Notice that would also be deemed 
System E-CD Templates. Any edits to the System E-CD Templates would not 
affect E-CDs that were previously issued into DTC.
    More complex CDs that do not conform to the System E-CD Templates, 
including those referred to as structured CDs, would be excluded from 
the proposed new process, because they typically contain terms that are 
not amenable to the creation of fixed templates in the format proposed 
herein.
    Upon implementation, Participants would request eligibility for E-
CDs that conform to the System E-CD Templates through a new system 
referred to as Underwriting Central (``UWC''). UW SOURCE would continue 
to remain available for other types of issuances, including the 
issuances of CDs in physical form.
    In order to request eligibility of a CD to be issued in electronic 
form, the Underwriter would provide all required information relating 
to the CD through UWC, including but not limited to offering 
documentation and the terms to be populated in the electronic 
certificate. The relevant data (e.g., interest rate(s) and maturity 
date) will be populated into the templates as entered by the 
underwriter into the UWC application. It would be the responsibility of 
the Underwriter to disseminate the electronic master certificate to the 
issuer for electronic signature via UWC. The issuer would be required 
to electronically sign and Deliver the master certificate to DTC prior 
to closing.
    For CDs that do not conform to the System E-CD Templates, 
eligibility request would continue to be entered by the Underwriter 
through UW SOURCE and a physical certificate delivered to DTC prior to 
closing.
    Whether issued in electronic or physical form, securities should be 
delivered to DTC by no later than noon Eastern Time on the business day 
prior to the Closing Date as currently specified in Exhibit B of the 
OA.
    In addition, each issuer that opts to issue E-CDs would be required 
to provide a new BLOR designed for use with the E-CD program, as 
described below.
Legal Framework Supporting Issuance of Electronic CDs
    The following discussion is provided by DTC and includes its own 
analysis of applicable state law provisions that DTC believes supports 
the validity of the issuance and Deposit of E-CDs at DTC pursuant to 
the proposed rule change. Based on its analysis, DTC believes that the 
proposed rule change would allow E-CDs to be electronically generated, 
signed, Delivered to DTC and held in electronic form in a secure E-
vault within a legal framework that supports the validity of E-CDs in a 
manner comparable to that of physical issuance and Deposit of CDs that 
are eligible for DTC services pursuant to the Rules and Procedures. 
This analysis is not part of the proposed rule, but a separate, 
analysis of applicable law. DTC emphasizes that neither the following, 
nor any aspect of the proposed rule change, is intended by DTC to be 
legal advice by DTC to any Participant, issuer or other third party, 
and should not be considered to be legal advice by DTC to any 
Participant, issuer, or other third party.

[[Page 78374]]

DTC's Rules are Governed by the Law of New York
    DTC's activities and its Rules are structured in accordance with 
the laws of New York and the United States, and provide that they shall 
be governed by, and construed in accordance with, the law of New 
York.\18\ A principal law comprising the legal framework under which 
DTC operates includes, but is not limited to, the NYUCC, which among 
other things, supports a legal framework for the issuance of Securities 
and the indirect holding system, under which DTC credits in Securities 
to its Participants.
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    \18\ See Rule 2, supra note 3.
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NYUCC and Electronic Signature Laws; and Impact Regarding E-CDs
    CDs are ``negotiable instruments'' under Article 3 of the Uniform 
Commercial Code (the ``UCC''),\19\ which has been adopted in New York 
under the NYUCC,\20\ and, depending on how they are structured, may 
also be ``securities'' and/or ``financial assets,'' as defined in 
Article 8 of the UCC, which has been adopted in New York under the 
NYUCC.\21\ In addition, because the CDs are held in DTC through the 
indirect holding system, the rights and duties of DTC, as a securities 
intermediary, and its Participants, as entitlement holders, are 
governed by Part 5 of Article 8 of the UCC,\22\ also adopted in New 
York under the NYUCC. In this regard, the rights and obligations 
associated with CDs held at DTC are governed by the relevant provisions 
of the NYUCC.
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    \19\ Unless otherwise specified, citations in this proposed rule 
change to provisions of the UCC are to the UCC as adopted in New 
York under the NYUCC.
    \20\ See NYUCC 3-102 and 3-104 (defining CDs as negotiable 
instruments).
    \21\ See NYUCC 8-102 (for NYUCC definitions of ``financial 
asset'' and ``security'').
    \22\ See NYUCC 8-501-8-508.
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    Section 8-110 of the UCC provides that only the law of the issuer's 
jurisdiction will govern the ``validity'' of a ``security''--the laws 
of another jurisdiction cannot be selected to govern validity issues. 
The term ``validity'' is not defined in the UCC. DTC believes that laws 
governing the creation and existence of an electronic record as a 
substitute for a written instrument may be viewed as laws that govern 
the ``validity'' of an instrument.\23\
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    \23\ See Comment 2 to Section 8-110 of the UCC (explaining that 
the law of the issuer's jurisdiction governs the validity of a 
security in order to ensure that a single body of law governs the 
questions addressed in Part 2 of Article 8). Part 2 of Article 8 of 
the UCC describes the circumstances in which an issuer can and 
cannot assert invalidity as a defense against purchasers, including 
lack of genuineness, unauthorized signatures and incomplete 
certificates. This implies that the term ``validity'' in Section 8-
110 of the UCC refers to a broader set of issues than just the 
validity of issuance of the security under the issuer's governing 
documents and local law.
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    An E-CD that is both a negotiable instrument and a security, will 
be governed as to its validity by the law of the issuer's jurisdiction, 
by virtue of Section 8-110 of the UCC. If the validity of a security is 
determined to include its electronic nature, then the electronic 
signature and record laws of each individual issuer's jurisdiction 
would apply to each E-CD. Therefore, requiring an E-CD to be a security 
could adversely impact the valid issuance of the E-CD if the laws of 
the issuer's jurisdiction do not contemplate the electronic signature 
of a security.
    However, as discussed below, Article 3 negotiable instruments allow 
for a choice of law. In this regard, DTC believes that requiring E-CDs 
to be issued as negotiable instruments would facilitate the valid 
issuance of E-CDs regardless of an issuer's jurisdiction, so long as 
the law of a jurisdiction that contemplates the use of electronic 
signatures as part of a valid issuance is chosen to govern the E-CD.
    As more fully described in the discussion of electronic signature 
laws provided by DTC below, DTC proposes to apply New York law for this 
purpose, but also proposes to design the E-CD program such that E-CDs 
issued into DTC would be valid under the laws of all states that allow 
the use of electronic records and signatures in any transaction that 
would otherwise require a paper document and/or wet-ink signature.
Discussion of Electronic Signature Laws
The New York Electronic Signatures and Records Act
    The New York Electronic Signatures and Records Act \24\ (``ESRA'') 
governs the validity of electronic records and signatures in New York. 
ESRA is like UETA in that it accords the same power and effect to 
electronic records and signatures as would otherwise be accorded to 
writings under New York law.
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    \24\ N.Y. State Tech. Law Sec.  30[] (McKinney 2012).
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    ESRA does not apply to negotiable instruments, such as CDs, unless 
an electronic record of such instrument is created, stored or 
transferred in a manner that meets the Uniqueness Standard. If the 
Uniqueness Standard is met, then CDs that are issued, created and 
signed electronically have the same power and effect as paper CDs under 
New York law.
The Uniform Electronic Transactions Act
    The Uniform Electronic Transactions Act \25\ (``UETA''), has been 
adopted in various forms by 47 U.S. states.\26\ UETA generally allows 
parties to agree to use electronic records and signatures in any 
transaction that would have otherwise required a paper document and/or 
wet-ink signature.
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    \25\ Unif. Electronic Transactions Act (Unif. L. Comm'n 1999).
    \26\ Illinois, New York and Washington have not adopted UETA. 
Although it has adopted UETA, California has not adopted Section 16 
of UETA, which, as described in further detail below, is the section 
of UETA that provides for the electronic creation, signature and 
storage of negotiable instruments such as CDs.
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    Section 16 of UETA \27\ provides legal support for the creation, 
transferability and enforceability, of, among other things, negotiable 
instruments such as CDs, if they meet the following standards:
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    \27\ Unif. Elec. Transactions Act Sec.  16 (Unif. L. Comm'n 
1999).
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     The E-CD must be a ``transferable record,'' which is 
defined, in part, as an electronic record that would be a note under 
Article 3 of the UCC (CDs are notes in all relevant UETA 
jurisdictions), and the issuer has expressly agreed that it is a 
transferable record.
     The E-CD must initially be created as an electronic 
record, and not as a paper document that is converted to one.\28\
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    \28\ See Comment 2 to Section 16 of UETA (explaining that 
Section 16 is not intended to cover the conversion of a paper note 
to an electronic record; instead, transferable records must be 
electronic at the time they are created).
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     Each E-CD must be stored in a system that meets the 
following standards (the ``Section 16 Safe Harbor''):
    [cir] The E-CD is created, stored and assigned in a manner that a 
single authoritative copy of the transferable record exists which is 
unique, identifiable and, subject to certain exceptions, unalterable 
(the ``Uniqueness Standard'').
    [cir] The authoritative copy must (i) identify the person claiming 
control (i.e., the person to which the transferable record was issued 
or transferred), (ii) be maintained by the person claiming control or 
its designee and (iii) be unalterable except with the permission of the 
person claiming control.
    [cir] Copies of and authorized revisions to the authoritative copy 
must be clearly marked as such.
    DTC believes that any E-CD that is a transferable record and is 
stored in a system that falls within the Section 16

[[Page 78375]]

Safe Harbor will have the same rights and obligations of an equivalent 
writing under the UCC.\29\
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    \29\ Because Section 16 of UETA only contemplates a transferable 
record that has been electronic since its creation and requires that 
the transferable record comply with the Section 16 Safe Harbor, 
including the Uniqueness Standard, at all times, DTC believes that 
the legal issues relating to the electronic signature of a 
negotiable instrument such as a CD are necessarily intertwined with 
its electronic creation and storage. Thus, an electronic negotiable 
instrument cannot be created outside of an appropriate system that 
complies with the Section 16 Safe Harbor even if electronically 
signed.
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    Because the Section 16 UETA provisions are more robust than ESRA 
and the guidance in Section 16 of UETA is more developed, the E-CDs 
that would be made eligible by DTC would be structured to meet the 
requirements of UETA, including the Section 16 Safe Harbor, even 
though, as discussed below, the E-CDs will also be structured so that 
they are governed by New York law (including ESRA).\30\ This construct 
will help ensure that an E-CD also will remain valid in the 
jurisdictions that have adopted Section 16 of UETA, in the unlikely 
event that a court of competent jurisdiction would determine not to 
recognize the selection of New York law.
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    \30\ Although Section 307 of ESRA does not provide the same 
robust provisions and commentary as Section 16 of UETA, it is still 
sufficiently clear that E-CDs that meet the Uniqueness Standard are 
valid.
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E-Sign
    The federal Electronic Signatures in Global and National Commerce 
Act \31\ (``E-Sign'') generally provides for the legal effect, validity 
and enforceability of electronic signatures and records relating to 
transactions in interstate or foreign commerce and preempts state law 
with respect to such transactions except to the extent the state has 
enacted UETA or other alternative procedures or requirements that are 
consistent with E-Sign. E-Sign generally tracks the provisions of UETA 
but does not apply to transactions that are governed by the UCC, such 
as the issuance of CDs. E-Sign's equivalent of Section 16 of UETA 
expressly limits the use of transferable records to debt obligations 
secured by an interest in real property (i.e., mortgage notes). 
Instead, state law must provide for the electronic creation and 
signature of a CD for it to be valid.
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    \31\ Electronic Signatures in Global and National Commerce 15 
U.S.C. Sec.  70[].
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Others
    In addition to New York, Illinois and Washington also did not adopt 
UETA. Illinois adopted an electronic records and signatures law that is 
similar to UETA and contains a section that is analogous to Section 16 
of UETA. Washington adopted an electronic records and signatures law 
that is very different than UETA and does not clearly contemplate or 
provide for the issuance of electronic negotiable instruments such as 
CDs. As noted above, California has not adopted Section 16 of UETA. 
Therefore DTC is unable to conclude whether CDs that are created, 
signed and stored electronically would be valid under Washington or 
California law because it has not identified a legal framework under 
those laws whereby an issuer could issue a valid E-CD that could in 
turn be Deposited at DTC in accordance with the proposed rule change.
Proposed Rule Changes
    Pursuant to the proposed rule change, DTC would amend the OA and 
Underwriting Service Guide, and create a new BLOR and the System E-CD 
Templates to be used exclusively for the issuance of E-CDs, in order to 
implement the proposed UWC system and E-vault for the issuance Delivery 
and Deposit of E-CDs and put in place the Procedures and a framework 
that conforms to the legal requirements for the maintenance of valid E-
CDs, as described above.
Each Issuer that Opts to Participate in the E-CD Program Would Sign a 
New BLOR.
    Pursuant to the proposed rule change, the OA would require each E-
CD issuer to submit a new BLOR (``E-CD BLOR'') to DTC through UWC prior 
to its first issuance of E-CDs. In order to minimize the additional 
provisions in the Electronic Master Certificate (as defined below), the 
E-CD BLOR would contain supplemental terms related to the E-CD program 
(in addition to the representations that are currently included in a 
BLOR). The new E-CD BLOR would provide that all E-CDs issued in 
connection therewith and under one of the base CUSIP numbers set forth 
on the face of the E-CD BLOR would be part of the same transaction in 
which the E-CD BLOR was executed.\32\
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    \32\ Section 3-119 of the NYUCC provides that a negotiable 
instrument may be ``modified or affected by any other written 
agreement executed as part of the same transaction.''
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    Pursuant to Section 3-119 of the UCC, a holder in due course of a 
negotiable instrument must have notice of any separate agreement in 
order to be subject to its limitations. Therefore, the Electronic 
Master Certificate (as defined below) would contain a reference to the 
new E-CD BLOR.\33\
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    \33\ While a CD cannot expressly be made subject to the terms of 
an additional agreement, Section 3-105(1)(c) of the UCC permits the 
CD to refer to or state that it arises out of a separate agreement.
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Each Issuer Issuing E-CDs Would Electronically Sign and Issue an 
Electronic Master Certificate.
    E-CDs would be issued on a new form of master electronic 
certificate (``Electronic Master Certificate'') that has been specially 
created for the E-CD program. A separate electronic Master Certificate 
would be issued by the issuer for each broker that participates in an 
E-CD offering. Because E-CDs must necessarily be created, signed and 
thereafter maintained in electronic form using a system that complies 
with the Section 16 Safe Harbor, including the Uniqueness Standard, DTC 
would only make eligible E-CDs that have been initiated by the related 
broker/dealer through UWC, then created, signed and submitted to DTC 
through an electronic signature system designed by DTC for this 
purpose. UWC would allow Participants to initiate a new E-CD issuance 
by creating a draft Electronic Master Certificate using the applicable 
System E-CD Template that would be sent to an issuer for verification 
and signature. The issuer will verify and affix its electronic 
signature to the Electronic Master Certificate created by the 
Participant in a manner that creates an executed Electronic Master 
Certificate that complies with the Uniqueness Standard.
Once Issued, Each Original Electronic Master Certificate Would be 
Automatically Stored in an Electronic Vault Repository.
    Once an issuer verifies and affixes its electronic signature to an 
Electronic Master Certificate, the Electronic Master Certificate would 
be automatically stored in an E-vault repository that complies with the 
Section 16 Safe Harbor, and the Electronic Master Certificate would 
immediately be deemed ``Delivered'' to DTC. The E-vault will identify 
Cede & Co. as the person to which the Electronic Master Certificate was 
issued. The E-vault will maintain an audit trail that will track all 
events that occur with respect to the Electronic Master Certificate, 
including any authorized changes, such as notations to reflect 
withdrawals, which will be noted in the audit trail instead of on the 
body of the Electronic Master Certificate. The audit trail will be 
incorporated as part of the Electronic

[[Page 78376]]

Master Certificate in accordance with the BLOR.
E-CDs Would be Governed by New York Law.
    The parties would select New York law as the governing law for all 
E-CDs, as described below. Because there are variations between the 
electronic record and signature laws (including in the provisions of 
UETA, as adopted) across the various U.S. jurisdictions, the selection 
of New York law (including ESRA) as the law governing the E-CDs would 
allow DTC to structure a single E-CD program that will be valid for 
issuers in all U.S. jurisdictions.
    DTC believes that the System E-CD Templates for the E-CDs and the 
proposed BLOR to be used for E-CD issuances have been structured in a 
manner that complies with the applicable rules governing jurisdiction 
selection, as follows:
     Each BLOR would provide that the laws of New York would 
govern the terms of the E-CD, which is issued and payable to DTC in New 
York. The jurisdiction selection rule in Section 1-301 of the UCC, 
which applies to CD issuances under Article 3 of the UCC, allows 
parties to a transaction that bears a reasonable relation to a state to 
select the laws of that state to govern their rights and duties.
     Each Electronic Master Certificate would have a minimum 
denomination of $250,000. The jurisdiction selection rule in Section 5-
1401 of the New York General Obligations Law allows parties to any 
transaction that results in an obligation of at least $250,000 to 
select New York law to govern their rights and obligations.
     Each Electronic Master Certificate would expressly provide 
that it is payable in New York. The general rule in New York (and in 
most other jurisdictions) is that a note (such as a CD) that is 
executed in one state and payable in another, is governed as to its 
nature, validity, interpretation and effect by the laws of the state 
where it is made payable.
E-CDs Would be Structured as ``financial assets''--but not as 
``Securities''--Under Article 8 of the UCC.
    Section 8-110 of the UCC provides that only the law of the issuer's 
jurisdiction will govern the ``validity'' of a ``security''--the laws 
of another jurisdiction cannot be selected to govern validity issues. 
The term ``validity'' is not defined in the UCC. DTC believes that laws 
governing the creation and existence of an electronic record as a 
substitute for a written instrument may be viewed as laws that govern 
the ``validity'' of an instrument.\34\
---------------------------------------------------------------------------

    \34\ See Comment 2 to Section 8-110 of the UCC (explaining that 
the law of the issuer's jurisdiction governs the validity of a 
security in order to ensure that a single body of law governs the 
questions addressed in Part 2 of Article 8). Part 2 of Article 8 of 
the UCC describes the circumstances in which an issuer can and 
cannot assert invalidity as a defense against purchasers, including 
lack of genuineness, unauthorized signatures and incomplete 
certificates. This implies that the term ``validity'' in Section 8-
110 of the UCC refers to a broader set of issues than just the 
validity of issuance of the security under the issuer's governing 
documents and local law.
---------------------------------------------------------------------------

    CDs may be both ``negotiable instruments'' under Article 3 of the 
UCC and ``securities'' under Article 8 of the UCC, in which case the 
provisions of Article 8 will govern the CD.\35\ This means that an E-CD 
that is both a negotiable instrument and a security, will be governed 
as to its validity by the law of the issuer's jurisdiction, by virtue 
of Section 8-110 of the UCC. If the validity of a security is 
determined to include its electronic nature, then the electronic 
signature and record laws of each individual issuer's jurisdiction 
would apply to each E-CD, and the selection of New York's ESRA would 
not be valid. As a result, any jurisdiction that has not enacted a law 
that clearly provides for electronic negotiable records would 
necessarily have to be excluded from the E-CD program.\36\
---------------------------------------------------------------------------

    \35\ See Section 3-103(1) of the UCC (providing that Article 3 
does not apply to investment securities); Comment 2 to Section 3-103 
of the UCC (explaining that if an instrument is negotiable in form 
under Article 3, but is, because of its manner of use, a 
``security'' under Article 8, Article 8 and not Article 3 applies); 
and Section 8-103(d) of the UCC and Comment 5 to Section 8-103 of 
the UCC (providing that a writing that is a security certificate is 
governed by Article 8, even though it also meets the requirements of 
Article 3).
    \36\ In particular, as noted above, if the E-CDs are Article 8 
securities, then DTC would be unable to conclude that E-CDs would be 
valid under the laws of California and Washington, and issuers in 
California and Washington would likely be excluded from the E-CD 
program.
---------------------------------------------------------------------------

    In order to ensure that the parties can properly choose New York 
law, including ESRA, to govern the E-CDs, E-CDs would be structured so 
that they are not Article 8 Securities. To do this, each Electronic 
Master Certificate would provide that it can be transferred only by 
delivery and indorsement. A ``security,'' as defined in Section 8-
102(a)(15) of the UCC, must be in ``bearer'' or ``registered'' form. 
``Bearer form'' requires that the security be payable to bearer. 
Because each Electronic Master Certificate would be payable to Cede & 
Co., as nominee for DTC, it would not be in bearer form. ``Registered 
form'' requires that transfers of a security be registered upon books 
maintained for that purpose by or on behalf of the issuer, or the 
security certificate must so state. Because E-CDs would be 
transferrable only by delivery and indorsement and not on the books of 
the issuer, they will not be in registered form and therefore will not 
fall within the definition of ``security'' in Article 8 of the UCC.
    Although the E-CDs would not be Article 8 securities, under Section 
8-103(d) of the UCC they will still be ``financial assets'' if held in 
a securities account.\37\ DTC Rule 6 provides, among other things, that 
DTC will accept Securities for deposit and may offer such other 
services as are consistent with its purposes and powers.\38\ 
``Securities'' are defined in the DTC Rules as anything that would be a 
``financial asset'' under Section 8-102 of the UCC. The DTC Rules 
further provide that any item credited to a securities account will be 
deemed a Security under the DTC Rules and treated as a financial asset 
under Article 8 of the UCC. Accordingly, E-CDs, each of which will be a 
financial asset under Article 8 of the UCC, may be made eligible by 
DTC, credited by DTC to the securities accounts of its participants, 
and treated as a ``Security'' for all purposes, in each case under the 
DTC Rules.
---------------------------------------------------------------------------

    \37\ Section 8-103(d) of the UCC provides, in part, ``a 
negotiable instrument governed by Article 3 is a financial asset if 
it is held in a securities account.'' See also, the definition of 
``financial asset'' in Section 8-102(a)(9) of the UCC, which 
provides that any property held by a securities intermediary for 
another person in a securities account will be a financial asset if 
the securities intermediary has expressly agreed with the other 
person that the property is to be treated as such.
    \38\ DTC's corporate powers are listed in its Organization 
Certificate, which include, among other things, the receipt on 
deposit for safe-keeping money, securities, papers of any kind and 
any other personal property for the account of its participants in 
connection with DTC's acting as a clearing corporation.
---------------------------------------------------------------------------

    The rules relating to the indirect holding system, security 
entitlements and the rights and duties of securities intermediaries 
(e.g., DTC) and entitlement holders, which are specified in Part 5 of 
Article 8 of the UCC, apply to all financial assets.\39\ Thus, although

[[Page 78377]]

the E-CDs would not be securities, because they would be financial 
assets, they may be issued and deposited with DTC, and DTC can credit 
security entitlements therein to its Participants, as it currently does 
with respect to paper CDs.\40\ E-CDs would be maintained as fungible 
bulk by DTC, in accordance with the requirement in Section 8-504 of the 
UCC that a securities intermediary maintain a financial asset in a 
quantity corresponding to the aggregate of all security entitlements it 
has established therein.\41\
---------------------------------------------------------------------------

    \39\ See Comment 5 to Section 8-103 of the UCC (explaining that 
the indirect holding rules apply to any Article 3 negotiable 
instrument that is held through a securities intermediary; Comment 9 
to Section 8-102 of the UCC (explaining that the indirect holding 
rules in Part 5 of Article 8 may apply to financial assets even 
where the rules in Parts 2, 3 and 4 of Article 8 do not apply); and 
Comment 1 to Section 8-104 of the UCC (explaining that Article 3 and 
not Article 8 specifies how one acquires a direct interest in a 
bankers' acceptance, which is a negotiable instrument under Article 
3 and a financial asset under Article 8, and Part 5 of Article 8 
governs the rights of a clearing corporation's participants with 
respect to a bankers' acceptance that is held by the clearing 
corporation on account for its participants).
    \40\ DTC currently accepts for deposit bankers' acceptances, 
which are not Article 8 securities, and proposes to do the same with 
respect to the E-CDs.
    \41\ Comment 1 to Section 8-504 of the UCC explains that Section 
8-504 recognizes the reality that these items are held as fungible 
bulk and are not identified to a customer. The language in Section 
8-504 of the UCC applies to all financial assets (not just 
securities) and would therefore provide the basis for holding E-CDs 
as fungible bulk, even if they are not Article 8 securities.
---------------------------------------------------------------------------

Summary of Selected E-CD Terms
    Section 3-104 of the UCC provides that a negotiable instrument may 
only contain an unconditional promise to pay a sum certain, a 
prescribed set of other obligations and powers, and no other promise, 
order, obligation or power. Because it is unclear exactly what would 
constitute an additional obligation or power, only those provisions 
that are necessary to ensure that a holder can ascertain all of the E-
CDs essential terms \42\ would be included in the Electronic Master 
Certificate, either directly, or by reference to the issuer's E-CD 
BLOR.
---------------------------------------------------------------------------

    \42\ See Comment 8 to Section 3-105 of the UCC (``an instrument 
is not negotiable unless the holder can ascertain all of its 
essential terms from its face'').
---------------------------------------------------------------------------

Selected Terms Contained in the Master Electronic Certificate
    The following terms would be included in each System E-CD Template:
     The E-CD would be payable in New York--this ensures that 
the E-CD will be governed by New York law.
     The E-CD is issued in connection with a BLOR between the 
issuer and DTC--this allows for the additional terms contained in the 
BLOR to modify or affect the terms of the E-CD and puts any holder of 
the E-CD on notice of the existence of such additional terms.
     The E-CD is an electronic record created in accordance 
with ESRA, and a transferable record under UETA--this makes clear the 
issuer's intent that the E-CD be a valid electronic instrument under 
both ESRA and UETA.\43\
---------------------------------------------------------------------------

    \43\ Section 16 of UETA requires that the issuer expressly agree 
that the E-CD is a transferable record. Comment 2 to Section 16 of 
UETA explains that it is likely that this agreement will be set 
forth in the body of the electronic record.
---------------------------------------------------------------------------

     The E-CD would be stored in the E-vault--this is necessary 
to understand how the notation and transfer provisions in the 
Electronic Master Certificate will work.
     The E-CD may be transferred only by delivery and 
indorsement--this ensures that the E-CD would not be an Article 8 
security and, therefore, not subject to the limitation on jurisdiction 
selection with respect to validity.
Selected Terms Contained in the BLOR:
     Paper out provision--this allows DTC to convert the E-CD 
to a paper CD, if deemed necessary, without further action from the 
issuer.
     Selection of New York governing law and jurisdiction--
included in the BLOR to minimize additions to the Electronic Master 
Certificate.
     No contravention representation by the issuer--the issuer 
is responsible for ensuring that the issuance of an E-CD complies with 
applicable local law and regulation and the issuer's governing 
documents.
Other Proposed Changes to the OA
    In addition to the proposed changes described above, the OA would 
be amended as follows:
    a. Section I.A.1. would be amended to add a reference to UWC, in 
addition to UW SOURCE, as a system that may be used by Participants to 
submit eligibility requests. Additionally, the hyperlink to the website 
of DTC's parent, The Depository Trust & Clearing Corporation (``DTCC'') 
for information on UW SOURCE will be amended to refer to the 
Underwriting section of DTCC's website. The proposed changes in this 
section would facilitate Participants' ability to access DTC's systems 
for eligibility requests.
    b. Section 1.B.1 relating to the documentation requirements for BEO 
Securities would be amended to add a new subsection c. with the 
following text under a new heading titled ``Electronic Certificates for 
Retail CDs'':
    Issuers leveraging the use of electronic master certificates for 
Retail CDs must submit to DTC on DTC's form, a fully executed BLOR and 
its associated Rider, for each base CUSIP issuing Retail CDs through 
the electronic process. For the current form of the E-CD BLOR please 
refer to https://www.dtcc.com/legal/issue-eligibility.
    In addition, subsection a. of this Section, which describes the 
current Letter of Representation requirements for BEO Securities, would 
be amended in order to clarify that the requirements described in that 
subsection apply to BEO Securities other than E-CDs, namely FAST 
securities or securities where a physical master certificate is 
delivered to DTC.
    The proposed changes to this section would facilitate Participants' 
and issuers' access to documentation used in connection with 
eligibility requests.
    c. Section 1.C.1., which relates to considerations relating to 
eligibility of CDs, would be amended to add a subsection c. that would 
be titled ``Electronic Master Certificates,'' to provide for issuance 
and Delivery of E-CDs and a legal disclaimer as follows:
    In lieu of issuing and delivering physical master certificates to 
DTC, the Underwriter can facilitate issuance of Retail CDs for state 
and federally chartered banks in electronic form by using specific 
master certificate templates (``System E-CD Templates'') provided by 
DTC through UWC.
    The relevant data (e.g., maturity date) will be populated into a 
System E-CD Template as entered by the Underwriter into the UWC 
application. It is the responsibility of the Underwriter to disseminate 
the populated electronic master certificate to the Issuer for 
electronic signature via UWC. The Issuer must electronically sign the 
electronic master certificate prior to closing.
    Each electronic master certificate is stored in a secure electronic 
vault maintained by DTC.
    For Retail CDs that do not conform to the System E-CD Templates, a 
physical master certificate must be delivered to DTC prior to closing.

    Note:  Whether issued in electronic or physical form, securities 
should be delivered to DTC by no later than noon ET on the business 
day prior to the Closing Date as outlined in Exhibit B.

    IMPORTANT LEGAL NOTICE:
    DTC DOES NOT VALIDATE, CERTIFY, REPRESENT OR SEEK TO CONFIRM (i) 
THE VALIDITY OF THE DATA ELEMENTS ENTERED BY A PARTICIPANT, ITS 
CORRESPONDENT UNDERWRITERS AND OR VENDORS INTO UWC (TOGETHER WITH ANY 
OTHER PERSON USING UWC, ``UWC USERS'') OR (ii) THE FITNESS OF THE 
ELECTRONIC MASTER CERTIFICATES FOR ANY PURPOSE. USE OF UWC AND/OR 
ELECTRONIC MASTER CERTIFICATES BY ANY UWC USER SHALL BE DEEMED TO 
CONSTITUTE A WAIVER OF ANY AND ALL CLAIMS (WHETHER DIRECT OR INDIRECT) 
AGAINST DTC AND ITS AFFILIATES, AND AN AGREEMENT THAT DTC

[[Page 78378]]

AND ITS AFFILIATES SHALL NOT BE LIABLE FOR ANY LOSS, COST, EXPENSE OR 
LIABILITY IN RELATION TO THE USE OF UWC AND/OR DISSEMINATION OR USE OF 
RELATED DOCUMENTATION, INCLUDING MASTER CERTIFICATES OF DEPOSIT, WHICH 
ARE PROVIDED ``AS IS.''
    EACH PARTICIPANT AGREES TO INDEMNIFY AND HOLD HARMLESS DTC AND ITS 
AFFILIATES FROM AND AGAINST ANY AND ALL LOSSES, DAMAGES, COSTS, 
JUDGMENTS, CHARGES AND EXPENSES ARISING OUT OF OR RELATING TO ANY USE 
OF UWC BY THE PARTICIPANT AND/OR ANY UWC USER, INCLUDING BUT NOT 
LIMITED TO ANY ISSUANCES OF CERTIFICATES OF DEPOSIT AND RELATED 
TRANSACTIONS BY SUCH PERSON OR ITS AFFILIATES, AGENTS, CUSTOMERS OR 
DESIGNEES.''
    This proposed change would facilitate the implementation and use of 
System E-CD Templates, as described above, and set forth a disclaimer 
by DTC and indemnification consistent with the requirements of DTC's 
current Rule and Procedures which allocate the responsibility to 
Participants for the accuracy of information and instructions provided 
by them to DTC and the indemnification of DTC by Participants in this 
regard.\44\
---------------------------------------------------------------------------

    \44\ See OA, supra note 3 at ii-iii and Rule 6, supra note 3.
---------------------------------------------------------------------------

    d. Exhibit B, which sets forth timeframes for submission of 
documents by Participants to DTC Underwriting in connection with 
eligibility requests, would be revised to reflect that the timeframes 
described in the exhibit relate to documents and information submitted 
through UWC, in addition to UW SOURCE. The proposed change to Exhibit B 
would align timeframes for submissions through UWC with those that 
apply to submissions to UWSOURCE.
    e. Technical changes with respect to spelling, punctuation and 
spacing of text would also be made. The proposed technical changes to 
the OA would provide enhanced clarity for Participants and Issuers with 
respect to Procedures relating to eligibility processing and the 
Deposit of CDs.
Proposed Changes to the Underwriting Service Guide
    a. A glossary description provided for BLOR in the Underwriting 
Guide currently describes a BLOR as an agreement between DTC and an 
issuer of municipal securities. As described above, a BLOR or LOR is 
required to be submitted with respect to any issue of BEO Securities 
which also includes corporate Securities. Pursuant to the proposed rule 
change, the text would be clarified so that the description of the term 
BLOR is not described as limited to applying only to municipal 
Securities. The proposed change to this glossary description would 
provide enhanced clarity for Participants and Issuers with respect to 
Procedures relating to eligibility documentation required for BEO 
Securities.
    b. Pursuant to the proposed rule change, DTC would eliminate 
references to the Participant Terminal System (``PTS'') functions ART 
and PUND as these functions have become obsolete. ART related to 
inquiries about transactions of a Participant processed by DTC and PUND 
related to inquiries relating to issues and certificates for issues 
held by a Participant. Participant inquiries may now be directed to the 
Client Center available on dtcc.com.\45\ The proposed rule change would 
update the Underwriting Service Guide to provide clarity for 
Participants on how to submit inquires relating to DTC's services.\46\
---------------------------------------------------------------------------

    \45\ See Securities Exchange Act Release No. 88050 (January 27, 
2020), 85 FR 5728 (January 31, 2020) (File No. SR-DTC-2020-002).
    \46\ Id.
---------------------------------------------------------------------------

    c. Pursuant to the proposed rule change, a reference to the IMPP 
function in PTS would be deleted. The IMPP function allowed 
Participants to view Important Notices about underwriting, transfer 
agents, and money market instruments (``MMI''). This function is not 
being widely used by Participants. All DTC Important Notices are 
accessible on dtcc.com.\47\
---------------------------------------------------------------------------

    \47\ See https://www.dtcc.com/legal/important-notices.
---------------------------------------------------------------------------

    d. The Section titled ``Packaging Inquiries'' provides information 
and requirements relating to the delivery of securities to DTC. 
Pursuant to the proposed rule change, DTC would add the following text 
under a subheading titled ``Retail (brokered) Certificates of Deposit'' 
to note the existence of the proposed process for E-CDs with a 
reference to the OA for additional information:
    In lieu of issuing and delivering physical master certificates to 
DTC, the Underwriter can facilitate issuance of Retail CDs for state 
and federally chartered banks in electronic form by using available 
master certificate templates through the Underwriting Central system 
(``UWC''), in accordance with the provisions of the OA.
    Each electronic master certificate deposited at DTC is stored in a 
secure electronic vault maintained by DTC.''
    This Section would also include use, waiver of liability and 
indemnification provisions as follows:
    IMPORTANT LEGAL NOTE:
    DTC DOES NOT VALIDATE, CERTIFY, REPRESENT OR SEEK TO CONFIRM (i) 
THE VALIDITY OF THE DATA ELEMENTS ENTERED BY A PARTICIPANT, ITS 
CORRESPONDENT UNDERWRITERS AND OR VENDORS INTO UWC (TOGETHER WITH ANY 
OTHER PERSON USING UWC, ``UWC USERS'') OR (ii) THE FITNESS OF THE 
ELECTRONIC MASTER CERTIFICATES FOR ANY PURPOSE. USE OF UWC AND/OR 
ELECTRONIC MASTER CERTIFICATES BY ANY UWC USER SHALL BE DEEMED TO 
CONSTITUTE A WAIVER OF ANY AND ALL CLAIMS (WHETHER DIRECT OR INDIRECT) 
AGAINST DTC AND ITS AFFILIATES, AND AN AGREEMENT THAT DTC AND ITS 
AFFILIATES SHALL NOT BE LIABLE FOR ANY LOSS, COST, EXPENSE OR LIABILITY 
IN RELATION TO THE USE OF UWC AND/OR DISSEMINATION OR USE OF RELATED 
DOCUMENTATION, INCLUDING MASTER CERTIFICATES OF DEPOSIT, WHICH ARE 
PROVIDED ``AS IS.''
    EACH PARTICIPANT AGREES TO INDEMNIFY AND HOLD HARMLESS DTC AND ITS 
AFFILIATES FROM AND AGAINST ANY AND ALL LOSSES, DAMAGES, COSTS, 
JUDGMENTS, CHARGES AND EXPENSES ARISING OUT OF OR RELATING TO ANY USE 
OF UWC BY THE PARTICIPANT AND/OR ANY UWC USER, INCLUDING BUT NOT 
LIMITED TO ANY ISSUANCES OF CERTIFICATES OF DEPOSIT AND RELATED 
TRANSACTIONS BY SUCH PERSON OR ITS AFFILIATES, AGENTS, CUSTOMERS OR 
DESIGNEES.
    The proposed changes to this section would facilitate the 
implementation and use of System E-CD Templates, as described above, 
and set forth a disclaimer by DTC and indemnification consistent with 
the requirements of DTC's current Rule and Procedures which allocate 
the responsibility to Participants for the accuracy of information and 
instructions provided by them to DTC and the indemnification of DTC by 
Participants in this regard.\48\
---------------------------------------------------------------------------

    \48\ See Underwriting Service Guide at 2-3, supra note 3 at ii-
iii and Rule 6, supra note 3.
---------------------------------------------------------------------------

System Access and Information Security Considerations
    A Participant controls access to its account and transaction 
information relating to its holdings and activity in DTC's systems 
through DTCC's access

[[Page 78379]]

coordinator program.\49\ This program includes, but is not limited to, 
controls on access to UWSOURCE, and would also encompass UWC access 
upon implementation of the proposal. DTC may provide to the issuer of 
any security, including but not limited to CDs, at any time credited to 
the Account of a Participant the name of the Participant and the amount 
of the issuer's securities so credited, and the Corporation is 
authorized to provide similar information to any appropriate 
governmental authority.\50\ An issuer must provide authorization 
annually for a third party agent to obtain access to an position 
information with respect to Securities of such issuer.\51\
---------------------------------------------------------------------------

    \49\ https://www.dtcc.com/client-center/access-coordinators.
    \50\ See Rule 2, supra note 3.
    \51\ See OA, supra note 3 at 55.
---------------------------------------------------------------------------

    DTCC, for itself and on behalf of its subsidiaries, including DTC, 
maintains a privacy policy, which among other things, states that DTCC 
maintains an information security program setting forth standards for 
maintaining administrative, technical and physical safeguards to 
protect the personal information provided by users of services, which 
would include personal information provided through the E-CD program, 
against accidental, unlawful or unauthorized destruction, loss, 
alteration, access, disclosure or use. DTCC periodically tests the 
security protections of its information systems and monitors the 
effectiveness of its information security controls, systems and 
procedures.\52\
---------------------------------------------------------------------------

    \52\ See Privacy Policy on DTCC website, available at https://www.dtcc.com/privacy.
---------------------------------------------------------------------------

Implementation Timeframes
    The proposed rule change would be implemented by DTC in two phases, 
with the first phase beginning after approval of the proposed rule 
change by the Commission and prior to the end of January 2021.
    Initially, underwriters would be invited to participate, on a 
voluntary basis. The underwriters that would participate in this 
initial phase are those that expressed interest in participating after 
outreach by DTC to those Participants that participated in the 
development of the proposed E-CD program. The Participants that would 
participate during the first phase are those Participants that expect 
to be able to submit an issuance during this phase that would meet the 
requirements of the proposed E-CD program, as those requirements are 
described above. This phased approach to implementation would 
facilitate a smooth transition, from an operational perspective, for 
ultimately making UWC available for all E-CD offerings of state and 
federally chartered banks that conform to the System Templates.
    Subsequently, the E-CD program would be made available to all 
underwriters in early 2021, with the implementation date of such 
availability to be announced via Important Notice. Upon approval of the 
proposed rule change, a legend would be added to the OA and 
Underwriting Service Guide indicating that the applicable provisions 
relating to E-CDs would apply only to (i) issuers whose issuances are 
submitted to DTC through UWC and (ii) Participants that submit and/or 
hold eligible issuances submitted through UWC, during this first phase, 
until a date to be announced by DTC via Important Notice when the E-CD 
program would become available, on a voluntary basis, for all eligible 
issuances. This legend would read as follows:
    Applicable provisions relating to UWC and Electronic Master 
Certificates for Certificates of Deposit, as described herein, apply 
only to (i) Issuers whose issuances are submitted to DTC through UWC, 
and (ii) Participants that submit and/or hold eligible issuances 
submitted through UWC during an initial phase of the electronic CD 
program, until a date to be announced by DTC via Important Notice when 
the E-CD program would become available, on a voluntary basis, for all 
eligible issuances of state and federally chartered banks. This legend 
will be removed upon full implementation of the E-CD program on a date 
to be announced via Important Notice.
    Issuers and underwriters that choose not to use the new E-CD 
program could continue to use the existing process through UW SOURCE, 
including making Deposits using physical certificates.
2. Statutory Basis
Section 17A(b)(3(F) of the Act
    The Clearing Agencies believe that the Framework is consistent with 
Section 17A(b)(3)(F) of the Act,\53\ for the reasons described below.
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act \54\ requires, inter alia, that the 
rules of a clearing agency be designed to assure the safeguarding of 
securities and funds which are in the custody or control of the 
clearing agency or for which it is responsible. As described above, the 
proposed rule change would provide for the issuance of Electronic 
Master Certificates for E-CDs which would be stored in a secure E-
Vault, as described above. Therefore, by providing for the storage of 
E-CDs in a secure electronic vault, the proposed rule change is 
designed to assure the safeguarding of securities which are in the 
custody or control of DTC.
---------------------------------------------------------------------------

    \54\ Id.
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act also requires that the rules of the 
clearing agency be designed, inter alia, to promote the prompt and 
accurate clearance and settlement of securities transactions. DTC 
believes that the proposed rule change is consistent with this 
provision of the Act because DTC believes that the proposed E-CD 
program would reduce closing delays caused by disruptions to physical 
delivery of certificates by eliminating the need for DTC to receive 
original paper master certificates in advance of CD issuances that 
would be eligible for issuance through the new program. Therefore, by 
facilitating the potential reduction of closing delays for issuances of 
CDs that utilize the E-CD program, DTC believes that the proposed rule 
change would promote the prompt and accurate clearance and settlement 
of securities transactions.
    DTC also believes that the proposed rule changes are consistent 
with Section 17A(b)(3)(F), cited above, because by making technical 
changes with respect to spelling, punctuation and spacing of text 
within the Procedures, as described above, the proposed rule change 
would provide enhanced clarity for Participants and Issuers with 
respect to Procedures relating to eligibility processing and the 
Deposit of CDs. By providing Participants and Issuers with enhanced 
clarity with regard to the Procedures relating to, and therefore 
facilitating eligibility processing and the Deposit of CDs that may be 
the subject of transactions processed through the DTC system, DTC 
believes that the proposed rule change would promote the prompt and 
accurate clearance and settlement of securities transactions consistent 
with the Act.
Rule 17Ad-22(e)(1)
    Rule 17Ad-22(d)(1) promulgated under the Act \55\ requires that 
each registered clearing agency shall establish, implement, maintain 
and enforce written policies and procedures reasonably designed to 
provide for a well-founded, clear, transparent, and enforceable legal 
basis for each aspect of its activities in all relevant jurisdictions. 
As described above, DTC believes that requiring E-CDs at DTC to be 
negotiable instruments governed by New York law would allow for the 
valid issuance into

[[Page 78380]]

DTC of E-CDs of issuers in all relevant jurisdictions. Therefore, by 
providing for E-CDs to be deemed negotiable instruments governed by New 
York law, as described above, DTC believes that DTC's Rules and 
Procedures, as amended by the proposed rule change, would provide for a 
well-founded, clear, transparent, and enforceable legal basis for the 
valid issuance of E-CDs into DTC from issuers domiciled in any relevant 
jurisdiction.
---------------------------------------------------------------------------

    \55\ 17 CFR 240.1717Ad-22(d)(1).
---------------------------------------------------------------------------

    Also, as described above, because DTC believes the Section 16 UETA 
provisions are more robust than ESRA and the guidance in Section 16 of 
UETA is more developed, the proposal provides would provide that E-CDs 
that would be made eligible by DTC would be structured to meet the 
requirements of UETA, including the Section 16 Safe Harbor, even 
though, as discussed above, the E-CDs would also be structured so that 
they are governed by New York law (including ESRA).\56\ DTC believes 
that this construct will help ensure that an E-CD also would be valid 
in the jurisdictions that have adopted Section 16 of UETA, in the 
unlikely event that a court of competent jurisdiction would determine 
not to recognize the selection of New York law. Therefore, DTC believes 
that structuring E-CDs to meet the requirements of UETA would allow 
DTC's Rules and Procedures to provide additional support for a well-
founded, clear, transparent, and enforceable legal basis for the valid 
issuance of E-CDs into DTC from issuers domiciled in jurisdictions that 
have adopted Section 16 of UETA.
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    \56\ Although Section 307 of ESRA does not provide the same 
robust provisions and commentary as Section 16 of UETA, it is still 
sufficiently clear that E-CDs that meet the Uniqueness Standard are 
valid.
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    DTC believes that with respect to all jurisdictions, including 
those that have not adopted Section 16 of UETA or ESRA, the Procedures, 
as amended pursuant to the proposed rule change, would continue to 
facilitate the issuance of CDs in physical form into DTC. As indicated 
above, the validity of a physical security does not depend on the 
provisions of electronic signature laws. DTC believes that Article 8 of 
the UCC as adopted in all relevant jurisdictions allows for the 
physical issuance of CDs as securities. Therefore, an issuer from any 
relevant jurisdiction would continue to be able to issue valid CDs in 
physical form that meet DTC's eligibility requirements into DTC. 
Therefore, DTC believes that DTC's Procedures, as amended pursuant to 
the proposed rule change, would continue to provide a well-founded, 
clear, transparent, and enforceable legal basis for the valid issuance 
of CDs into DTC from issuers domiciled in any relevant jurisdiction.
Rule 17Ad-22(e)(10)
    Rule 17Ad-22(d)(10) promulgated under the Act \57\ requires that 
each registered clearing agency shall establish, implement, maintain 
and enforce written policies and procedures reasonably designed, inter 
alia, to, as applicable, establish and maintain operational practices 
that manage the risks associated with such physical deliveries. As 
mentioned above, the proposed rule change would eliminate the 
requirement for the delivery of a physical master certificate for a CD 
offering to the extent it is eligible for, and processed through, the 
electronic process established through UWC, and stored in the E-Vault. 
DTC believes the proposed electronic process for Delivery of E-CDs to 
DTC would reduce risks of loss related to the physical CDs that would 
otherwise be physically transported to DTC for Deposit and later 
returned to issuers or their agents for redemption upon maturity of the 
CD. Therefore, by reducing the risk of loss of physical master 
certificates by allowing their replacement with Electronic Master 
Certificates, DTC believes that the proposed rule change would 
establish and maintain operational practices that manage risks 
associated with eligible offerings of CDs, as described above.
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    \57\ 17 CFR 240.1717Ad-22(d)(10).
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Rule 17Ad-22(e)(11)
    Rule 17Ad-22(e)(11) promulgated under the Act \58\ requires that 
each covered clearing agency shall establish, implement, maintain and 
enforce written policies and procedures reasonably designed to, as 
applicable, when the covered clearing agency provides central 
securities depository services: (i) Maintain securities in an 
immobilized or dematerialized form for their transfer by book entry, 
ensure the integrity of securities issues, and minimize and manage the 
risks associated with the safekeeping and transfer of securities; (ii), 
inter alia, prevent the unauthorized creation or deletion of 
securities; and (iii) Protect assets against custody risk through 
appropriate rules and procedures consistent with relevant laws, rules, 
and regulations in jurisdictions where it operates.
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    \58\ 17 CFR 240.1717Ad-22(d)(11)(i)(ii) and (iii).
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    DTC believes the proposed rule change is consistent with the 
provisions of Rule 17Ad-22(e)(11)(i), cited above, because (i) by 
providing for the Deposit of Securities in the name of Cede & Co. to be 
deposited in electronic form and stored in an electronic vault, the 
proposed rule change would provide for the immobilization and 
dematerialization of master certificates for the transfer of CDs by 
book entry, (ii) the integrity of E-CDs would be maintained by such 
storage in the secure electronic vault and (iii) it would minimize the 
risks associated with the safekeeping and transfer of securities by 
providing for purely electronic processing of the certificates and 
therefore preventing potential of loss of certificates if the 
applicable issues were to be issued and processed in physical form.
    DTC believes the proposed rule change is consistent with the 
provisions of Rule 17Ad-22(e)(11)(ii), cited above, because it would 
provide for a process allowing the issuance and Deposit of the related 
Securities through the use of UWC and associated System Templates for 
creation of E-CDs, signature of E-CDs and Delivery of the E-CDs to DTC 
for storage in the E-Vault. Through the use of this centralized process 
for issuance and processing of CDs, the proposed rule change would 
facilitate the prevention of the unauthorized creation or deletion of 
securities processed through the E-CD program.
    DTC believes the proposed rule change is consistent with the 
provisions of Rule 17Ad-22(e)(11)(iii) because, as discussed above, it 
would provide for Procedures for the issuance of E-CDs, Deposit of E-
CDs, and custody of E-CDs in the E-Vault in a manner consistent with 
the requirements applicable to the validity of electronic negotiable 
instruments under the NYUCC and the e-signature laws, as discussed 
above. The applicable Procedures would be established through proposed 
rule changes to the Underwriting Service Guide and the OA, and the 
utilization of Electronic Master Certificates in the forms of System E-
CD Templates issued under the applicable E-CD BLOR, as discussed above. 
Therefore, DTC believes that E-CDs issued, Deposited and stored in 
accordance with the proposed rule change would be Financial Assets that 
constitute Eligible Securities under the Rules, and would be valid and 
binding negotiable instruments under applicable law, and therefore 
protect the applicable assets against custody risk through appropriate 
rules and procedures consistent with relevant laws, rules, and 
regulations in jurisdictions where DTC operates.

[[Page 78381]]

(B) Clearing Agency's Statement on Burden on Competition

    Once the proposed rule change is fully implemented as described 
above, DTC does not believe that the proposed rule change would have 
any impact, or impose any burden, on competition because the proposed 
rule change provides for an additional method under which Participants 
may request eligibility of, process, and Deliver CDs on a voluntary 
basis. The new method would be available to all Participants through 
UWC, on a date to be announced by Important Notice.
    The existing method for Deposit of CDs at DTC, that includes the 
use of a physical master certificate, would continue to remain 
available to all Participants even after the new E-CD process was 
implemented.
    DTC does not believe that the aspect of the proposed rule change to 
initially make the proposed E-CD process available to a subset of 
Participants prior to full implementation, as described above, would 
have any impact, or impose any burden on competition. Participants not 
participating in the initial phase described above would be able to 
continue to Deposit eligible CDs in physical form. However, to the 
extent the proposed rule change could cause a burden because certain 
Participants would continue to be able to Deliver electronic 
certificates during an interruption of Participants' ability to make 
physical delivery of securities to DTC, and/or DTC's ability to accept 
physical deliveries of securities, DTC does not believe the burden have 
a significant impact on competition because Participants could utilize 
the LOP process, mentioned above, to effect Delivery of a security 
represented in physical form to DTC despite any such interruption of 
physical delivery services.
    DTC does not believe that the proposed rule change to make 
technical changes with respect to spelling, punctuation and spacing of 
text within the Procedures, as described above, would have any impact, 
or impose any burden, on competition because the technical changes 
would merely provide enhanced clarity with respect to the Procedures 
and not have an effect on the rights or obligations of Participants 
and/or Issuers with respect to eligibility processing and Deposit of 
Eligible Securities at DTC.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    DTC has not solicited or received any written comments relating to 
this proposal. DTC will notify the Commission of any written comments 
received by the DTC.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

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. 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 rule-comments@sec.gov. Please include 
File Number SR-DTC-2020-017 on the subject line.

Paper Comments

     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-2020-017. 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 website (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 website 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 website 
(http://dtcc.com/legal/sec-rule-filings.aspx). All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-DTC-2020-017 and should be submitted on 
or before December 28, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\59\
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    \59\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-26676 Filed 12-3-20; 8:45 am]
BILLING CODE 8011-01-P


