[Federal Register Volume 81, Number 238 (Monday, December 12, 2016)]
[Notices]
[Pages 89533-89543]
[FR Doc No: 2016-29668]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79488; File No. SR-DTC-2016-003]

Self-Regulatory Organizations; The Depository Trust Company;
Order Granting Approval of a Proposed Rule Change, as Modified by
Amendment No. 1, To Impose Deposit Chills and Global Locks and Provide
Fair Procedures to Issuers

December 6, 2016.

I. Introduction

    On May 27, 2016, The Depository Trust Company (``DTC'') filed with
the Securities and Exchange Commission (``Commission'') proposed rule
change SR-DTC-2016-003 pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder.\2\ The
proposed rule change was published in the Federal Register on June 9,
2016.\3\ The Commission received 10 comment letters to the proposed
rule change from five commenters, including three response letters from
DTC.\4\ Pursuant to Section 19(b)(2) of the Act,\5\ on July 21, 2016,
the Commission designated a longer period within which to approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to disapprove the proposed rule
change.\6\ On July 29, 2016, DTC filed Amendment No. 1 to the proposed
rule change. On September 6, 2016, the Commission published notice of
Amendment No. 1 and instituted proceedings under Section 19(b)(2)(B) of
the Act \7\ to determine whether to approve or disapprove the proposed
rule change.\8\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 77991 (June 3,
2016), 81 FR 37232 (June 9, 2016) (SR-DTC-2016-003) (``Notice'').
    \4\ See letter from Charles V. Rossi, Chairman, The Securities
Transfer Association (``STA''), Inc. Board Advisory Committee, dated
June 30, 2016, to Brent J. Fields, Secretary, Commission (``STA
Letter I''); letter from Dorian Deyet, dated June 30, 2016 (``Deyet
Letter''); letter from Ann K. Shuman, Managing Director and Deputy
General Counsel, DTC, dated July 21, 2016, to Brent J. Fields,
Secretary, Commission (``DTC Letter I''); letter from Harvey Kesner
(``Kesner''), Sichenzia, Ross, Friedman, Ference, dated August 11,
2016, to Brent J. Fields, Secretary, Commission (``Kesner Letter
I''); letter from Isaac Montal, Managing Director and Deputy General
Counsel, DTC, dated August 22, 2016, to Brent J. Fields, Secretary,
Commission (``DTC Letter II''); letter from Charles V. Rossi,
Chairman, STA Board Advisory Committee, dated August 29, 2016, to
Brent J. Fields, Secretary, Commission (``STA Letter II''); letter
from Kesner, Sichenzia, Ross, Friedman, Ference, dated August 30,
2016, to Brent J. Fields, Secretary, Commission (``Kesner Letter
II''); letter from Norman B. Arnoff (``Arnoff''), dated September 4,
2016 to Secretary Fields (``Arnoff Letter''); letter from Charles V.
Rossi, Chairman, STA Board Advisory Committee, dated October 3,
2016, to Brent J. Fields, Secretary, Commission (``STA Letter
III''); and letter from Ann K. Shuman, Managing Director and Deputy
General Counsel, DTC, dated October 17, 2016, to Brent J. Fields,
Secretary, Commission (``DTC Letter III''). See comments on the
proposed rule change (SR-DTC-2016-003), https://www.sec.gov/comments/sr-dtc-2016-003/dtc2016003.shtml.
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 78379 (July 21,
2016), 81 FR 49309 (July 27, 2016). The Commission designated
September 7, 2016, as the date by which it should approve,
disapprove, or institute proceedings to determine whether to
disapprove the proposed rule change.
    \7\ 15 U.S.C. 78s(b)(2)(B).
    \8\ See Securities Exchange Act Release No. 78774 (September 6,
2016), 81 FR 62775 (September 12, 2016).
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    Section II below provides an overview and brief description of both
DTC and the proposed rule change. Section III provides a summary of the
comments received and DTC's response to those comments. Section IV
provides a discussion of the proposed rule change,

the comments received, and details the Commission's findings with
respect to the proposed rule change. Finally, Section V concludes that,
for the reasons discussed below in Sections II through IV, the
Commission is granting approval of the proposed rule change, as
modified by Amendment No.1.

II. Description of the Proposed Rule Change

A. Background

1. DTC
    DTC plays a critical function in the national clearance and
settlement system. It is the nation's central securities depository,
registered as a clearing agency under Section 17A of the Act,\9\ and
its deposit and book-entry transfer services help facilitate the
operation of the nation's securities markets. As a registered holder of
trillions of dollars of securities, DTC processes enormous volumes of
securities transactions facilitated by book-entry movement of
interests, without transferring physical certificates. The Financial
Stability Oversight Council, pursuant to Title VIII of the Dodd-Frank
Wall Street Reform and Consumer Protection Act,\10\ designated DTC as a
Systemically Important Financial Market Utility.\11\
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    \9\ See Securities Exchange Act Release No. 20221 (September 23,
1983), 48 FR 45167 (October 3, 1983) (600-1).
    \10\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
    \11\ See Financial Stability Oversight Council, 2012 Annual
Report, Appendix A, available at https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Appendix%20A%20Designation%20of%20Systemically%20Important%20Market%20Utilities.pdf.
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    DTC's participants (``Participants'') are primarily broker-dealers
and banks, but as the nation's central securities depository, its role
and actions also affect issuers and investors.\12\ Participants agree
to be bound by the Rules, By-Laws, and Organization Certificate of DTC,
and other rules and procedures (collectively, ``Rules'').\13\ DTC
performs various services for Participants, including maintaining
accounts that list Participants' securities holdings and allowing
Participants to present securities to be made eligible for DTC's
depository and book-entry services. If a security is accepted by DTC as
meeting DTC's eligibility requirements for services \14\ and is
deposited with DTC for credit to the securities account of a
Participant, it becomes an ``Eligible Security.'' Thereafter,
Participants may deposit shares of that Eligible Security (``Deposited
Securities'') into their respective DTC accounts.
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    \12\ See In re International Power Group, Ltd. (``IPWG''),
Securities Exchange Act Release No. 66611 (March 15, 2012), 2012 SEC
LEXIS 844 at *24 (March 15, 2012) (Admin. Proc. File No. 3-13687).
    \13\ Available at http://www.dtcc.com/legal/rules-and-procedures.aspx.
    \14\ See Rule 5, supra note 13; DTC Operational Arrangements
(Necessary for Securities to Become and Remain Eligible for DTC
Services), January 2012 (the ``Operational Arrangements''), Section
1, available at http://www.dtcc.com/~/media/Files/Downloads/legal/
issue-eligibility/eligibility/operational-arrangements.pdf.
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    To facilitate book-entry transfers and other services that DTC
provides for its Participants, Deposited Securities are generally
registered on the books of the issuer of the Eligible Security
(typically, in a register maintained by a transfer agent) in DTC's
nominee name, Cede & Co. DTC maintains Deposited Securities that are
eligible for book-entry services in ``fungible bulk,'' meaning that
each Participant whose securities of an issue have been credited to its
securities account has a pro rata (proportionate) interest in DTC's
entire inventory of that issue, but none of the securities on deposit
are identifiable to or ``owned'' by any particular Participant.\15\
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    \15\ See Securities Exchange Act Release No. 19678 (April 15,
1983), 48 FR 17603, 17605, n.5 (April 25, 1983) (describing fungible
bulk); see also >N.Y. Uniform Commercial Code, Sec.  8-503, Off. Cmt
1 (``. . . all entitlement holders have a pro rata interest in
whatever positions in that financial asset the [financial]
intermediary holds'').
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2. Overview of DTC's Prior Practice With Respect to Service
Restrictions
    As detailed in a proposed rule change previously filed by DTC on
December 5, 2013,\16\ DTC currently imposes two types of service
restrictions: (i) A ``Deposit Chill'' whereby DTC refuses to accept
further deposits of an Eligible Security but continues to provide book-
entry services for existing shares of that Eligible Security already on
deposit with DTC; or (ii) a more stringent ``Global Lock'' whereby DTC
not only refuses to accept further deposits of an Eligible Security,
but also ceases to provide all book-entry services for existing shares
of that Eligible Security already on deposit with DTC.\17\
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    \16\ See Securities Exchange Act Release No. 71132 (December 18,
2013); 78 FR 77755 (December 24, 2013) (SR-DTC-2013-11). The filing
was in response to the Commission's opinion and order in IPWG, which
directed DTC to ``adopt procedures that accord with the fairness
requirements of Section 17A(b)(3)(H)'' of the Act.
    \17\ See Notice, 81 FR at 37232; see also SEC Investor Bulletin:
DTC Chills and Freezes, https://www.sec.gov/investor/alerts/dtcfreezes.pdf.
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    Prior to filing the current proposed rule change, DTC's practice
was to impose a Deposit Chill upon detecting suspiciously large
deposits of a thinly-traded Eligible Security.\18\ According to DTC,
such large deposits often were a red flag that could indicate a ``pump
and dump'' scheme or other illegal distribution related to that
security, and a Deposit Chill was necessary to maintain the status quo
and avoid allowing DTC's services to be used in furtherance of improper
activity.\19\ An issuer could obtain the release of a Deposit Chill by
providing to DTC a satisfactory legal opinion from independent counsel
establishing that the Eligible Security fulfilled DTC's requirements
for eligibility.\20\ If an issuer were non-responsive to DTC's requests
for information or otherwise refused or was unable to provide the
required legal opinion, a Deposit Chill could remain in effect for
years.\21\
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    \18\ See Notice, 81 FR at 37233.
    \19\ See DTC Service Restrictions on Certain Book-Entry
Securities--Procedures for Affected Issuers (September 2013), http://www.stai.org/pdfs/dtc-whitepaperresericesrestrictionsandissuerfairprocess.pdf.
    \20\ See Operational Arrangements, Section I.A, supra note 14.
    \21\ Notice, 81 FR at 37233.
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    Similarly, DTC's former practice was to impose a Global Lock if it
became aware of a judicial or administrative proceeding alleging a
violation of Section 5 of the Securities Act of 1933 (``Securities
Act'') with respect to an Eligible Security on deposit with DTC.\22\
According to DTC, such allegations in a formal legal proceeding
provided a concrete indication that Eligible Securities could have been
involved in an illegal distribution, making a Global Lock necessary to
maintain the status quo and avoid allowing DTC's services to be used in
furtherance of improper activity. Because of the gravity of the
allegations and the risk to DTC and its Participants of potentially
allowing DTC's services to be used in furtherance of improper activity,
a Global Lock would be released only when (i) the underlying action was
withdrawn, (ii) dismissed on the merits with prejudice, or (iii)
otherwise resolved in a final, non-appealable judgment in favor of the
defendants allegedly responsible for the violations of federal
securities laws. Because many actions are only resolved after several
years,\23\ a Global Lock also could be maintained for years.
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    \22\ Id.
    \23\ See, e.g., SEC v. Kahlon,12-CV-517 (E.D. Tex., filed August
14, 2012); SEC v. Bronson, 12-cv-06421-KMK (S.D.N.Y., filed August
22, 2012). As of the date of this filing, neither case has been
resolved.
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B. Proposed Rule Change

    DTC withdrew its prior proposed rule change regarding Deposit Chill
and Global Lock procedures, as described

above, on August 18, 2014.\24\ Since that time, according to DTC, its
prior practice of imposing Deposit Chills and Global Locks is no longer
effective at preventing the harms those restrictions were originally
intended to prevent, including, maintaining the status quo and
preventing DTC's book-entry services from being used in furtherance of
improper activity.\25\ In May 2016, DTC filed the current proposed rule
change. Based in part on DTC's determination that the prior process for
imposing Deposit Chills and Global Locks (together, ``Restrictions'')
is no longer effective at preventing or affecting the violative
behavior the Restrictions were originally designed to combat, DTC now
proposes to make significant changes to its processes and procedures
for imposing Restrictions. As discussed more fully below, DTC now
proposes, with certain limited exceptions as provided in Section 1(d)
of the proposed rule change, to limit the circumstances in which it
would impose a Restriction to the occurrence of a Financial Industry
Regulatory Authority, Inc. (``FINRA'') halt, Commission suspension, or
if DTC is ordered to impose the Restriction by a court of competent
jurisdiction.\26\ According to DTC, limiting Restrictions primarily to
these three occurrences would be more effective in preventing DTC's
services from being used in furtherance of improper activities.
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    \24\ See Securities Exchange Act Release No. 72860 (August 18,
2014), 79 FR 49825 (August 22, 2014) (SR-DTC-2013-11).
    \25\ Notice, 81 FR at 37233.
    \26\ Id.
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    Accordingly, as modified by Amendment 1, DTC's proposal would add
Rule 33 to DTC's Rules to establish the limited circumstances under
which DTC would impose a Restriction, as well as the fair procedures
for the issuer to receive notice and an opportunity to challenge the
Restriction and the standards DTC would apply to determine when to
release a Restriction. Section 1 of the proposed rule would establish
the four specific circumstances in which DTC may impose either a
Deposit Chill or a Global Lock. Section 2 would require DTC to send
written notice of the Restriction to the issuer of the Eligible
Security detailing the basis for the Restriction and the specific
procedures for the issuer to follow to challenge the Restriction. If an
issuer chooses to challenge a Restriction under Section 2, Section 3 of
the proposed rule establishes DTC's obligations with respect to
providing a written decision from an independent Review Officer in
response to that challenge. Section 4 identifies the specific bases
upon which DTC would release a Restriction, even in the absence of a
challenge by an issuer. Finally, Section 5 would clarify and limit the
scope and applicability of the proposed rule. Each section of the
proposed rule change is discussed in more detail below.
1. Section 1: The Specific Conditions Under Which DTC Could Impose a
Restriction
    Section 1 of the proposed rule establishes the conditions and the
type of Restriction that DTC would impose under various circumstances.
Under Section 1(a), DTC would impose a Global Lock if an Eligible
Security is the subject of a trading halt imposed by the FINRA. Under
Section 1(b), DTC would impose a Global Lock if an Eligible Security is
the subject of a trading suspension imposed by the Commission. The
proposed rule provides, however, that DTC would be permitted to decline
to impose a Global Lock under Sections 1(a) and (b) of the proposed
rule change if DTC reasonably determines that the Global Lock would not
further the regulatory purpose of the trading halt or suspension.\27\
For example, DTC could decline to impose a Global Lock if the reason
for a FINRA halt is to pause the market to give market participants
time to assess news of a pending event that may affect the security's
price,\28\ or the sole reason for a Commission suspension is the lack
of current and accurate information about the company because it failed
to file certain periodic reports with the Commission.\29\
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    \27\ Id. at 37233-34.
    \28\ The Commission notes that imposing a halt on this basis is,
in most instances, outside the scope of FINRA's trading halt
authority for unlisted securities. See FINRA Rule 6440.
    \29\ DTC Letter III at 3.
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    Under Section 1(c) of the proposed rule change, DTC would impose a
Restriction if ordered to do so by a court of competent jurisdiction.
DTC would impose the particular Restriction imposed by court, or if no
Restriction is specified, DTC would impose a Global Lock. According to
DTC, Restrictions would be necessary in the circumstances described in
Sections 1(a)-(c) to prevent settlement of trades that continue despite
the halt or suspension, and prevent the liquidation of a halted or
suspended position through DTC,\30\ and because DTC's facilities should
not be available to settle transactions otherwise prohibited by the
Commission, FINRA, or a court of competent jurisdiction.\31\
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    \30\ Id.
    \31\ Id.
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    Lastly, under Section 1(d) of the proposed rule change, DTC would
be permitted to impose a Restriction, either Deposit Chill or Global
Lock, if it identifies or otherwise becomes aware of a need for
immediate action to avert an imminent harm, injury, or other such
material adverse consequence to DTC or its Participants that could
arise from further deposits of, or continued book-entry services with
respect to, an Eligible Security. This provision would provide DTC with
flexibility to address unforeseen risks to DTC and its Participants,
which would not be addressed by the more narrow conditions enumerated
in Sections 1(a)-(c). DTC asserts that Section 1(d) would be invoked
rarely, and only if such a Restriction would be necessary to avoid a
significant material harm to DTC or one or more of its
Participants.\32\
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    \32\ Id.; see also Notice, 81 FR at 37234.
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2. Section 2: Timing and Procedural Requirements for Written Notice of
Restrictions and Opportunity To Object to Restrictions
    Section 2 of the proposed rule would establish the timing and
procedural requirements for DTC to provide an issuer with notice of a
Restriction and for the issuer to object to that Restriction. First,
DTC would be required to send a written ``Restriction Notice'' to the
issuer of the Eligible Security within three business days of the
imposition of the Restriction.\33\ Section 2(a) would require DTC to
include the following information in the Restriction Notice: (i) A
statement of the basis for the Restriction under Section 1, which would
be required to be set forth with reasonable specificity; (ii) the date
the Restriction was imposed; and (iii) that within 20 days of receiving
the Restriction Notice, the issuer may submit a written ``Restriction
Response'' setting forth its objection to the Restriction and the basis
for that objection under Section 4 of the proposed rule (discussed
below). If an issuer submits a Restriction Response, Section 2(b) would
permit DTC to request reasonable additional information or
documentation from the issuer. Section 2(c) specifies that an issuer
who fails to comply with a deadline required under Section 2 would
waive its right to make the submission required by the deadline.
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    \33\ The Restriction Notice would be send by overnight courier
to (i) the issuer's last known business address, and (ii) the last
known business address of the issuer's transfer agent, if any, on
record with DTC.

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3. Section 3: Timing and Procedural Requirements for DTC's Review of
and Written Response to an Issuer's Objection to a Restriction
    Section 3 of the proposed rule change establishes the process for
DTC to issue a Restriction Decision when, under Section 2, it receives
a Restriction Response. Specifically, Section 3 provides that DTC shall
provide the issuer with a written ``Restriction Decision'' within 10
business days of receipt of the Restriction Response.\34\ Under Section
3(a), the Restriction Decision would be required to be made by a
``Review Officer'' who did not have responsibility for the imposition
of the Restriction, or his delegate. The Review Officer would be
required to be an officer of DTC as defined in DTC's By-Laws.\35\ In
conducting his or her review, the Review Officer would be required to
look to the standards of review set forth in Section 4 of the proposed
rule (discussed below) to determine whether reasonable adequate cause
to release the Restriction exists.
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    \34\ The deadline may be extended for a reasonable period if DTC
has requested additional information or documentation from the
issuer pursuant to Section 2(b) of the proposed rule change, or by
consent of the issuer, the issuer's transfer agent, if any, or the
issuer's authorized representatives, if any.
    \35\ An officer is defined under the DTC By-Laws to be the
Executive Chairman of the Board, Chief Executive Officer, Chief
Operating Officer, or a Managing Director or other senior officers
or employees of DTC elected or appointed by the DTC Board pursuant
to the DTC By-Laws. See supra, note 13.
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    After receiving the Restriction Decision, an issuer would have 10
business days to submit a supplemental written response
(``Supplement''). However, a Supplement could only be submitted for the
purpose of establishing that DTC made a clerical mistake or mistake
arising from an oversight or omission in reviewing the Restriction
Response. If the issuer submits a Supplement, the Review Officer would
provide a Supplement Decision within 10 business days after the
Supplement was delivered. Section 3(d) of the proposed rule specifies
that, taken together, the Restriction Notice, the Restriction Response,
the Restriction Decision, the Supplement, the Supplement Decision, and
any other documents submitted in connection with the proposed
procedures would constitute the record for purposes of any appeal to
the Commission.
4. Section 4: Standards For Determining Whether Adequate Cause Exists
for Release of a Restriction
    Section 4 of the proposed rule establishes the specific grounds
upon which DTC would be required to release a Restriction imposed
pursuant to Section 1 of the proposed rule, even in the absence of a
Restriction Response from an issuer, by establishing when adequate
cause for the release of the Restriction would be deemed to exist. For
Global Locks imposed pursuant to Sections 1(a) or (b) of the proposed
rule change (i.e., when FINRA issues a trading halt or the Commission
issues a trading suspension), adequate cause to release the Global Lock
would exist when the halt or suspension was lifted. According to DTC,
because trading would no longer be prohibited by FINRA or the
Commission, there should not be any settlement restrictions at DTC,
other than operational restrictions imposed in the ordinary course of
business as otherwise provided for in DTC's Rules. Similarly, under
Section 4(c) of the proposed rule change, for a Restriction imposed
pursuant to Section 1(c) of the proposed rule change (i.e., an order
from a court of competent jurisdiction), adequate cause would exist to
release the Restriction when a court of competent jurisdiction orders
DTC to release the Restriction. DTC explains that if the court no
longer required the Restriction, there would be no reason for DTC to
continue to impose it.
    As noted above, Section 1(d) of the proposed rule change is
intended to provide DTC with necessary flexibility to address
unforeseen risks to it and its Participants, and thus DTC notes it is
impossible to outline with specificity all of the scenarios that could
give rise to a release of a Restriction under Section 1(d). However, to
provide a workable standard for evaluating when the release of a
Restriction imposed under Section 1(d), DTC provides that ``adequate
cause'' for the release of the Restriction would exist when DTC
reasonably determines that the release of the Restriction would not
pose a threat of imminent adverse consequences to DTC or its
Participants--typically meaning that the conditions underlying original
basis for the Restriction have abated. For example, a Section 1(d)
Restriction would be released when DTC determines that the perceived
harm has passed or is significantly remote, or when the basis for the
Restriction no longer exists.\36\ DTC also notes that, for Global Locks
in effect today that were originally imposed based on a judicial or
administrative proceeding under the prior procedures described above in
Section II.A.2, Section 4(d) of the proposed rule change would require
DTC to release the Global Lock, provided there currently is no
indication that illegally distributed securities are about to be
deposited.\37\
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    \36\ Notice, 81 FR at 37234.
    \37\ Id.
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    Lastly, Section 4(e) of the proposed rule change would require DTC
to release a Restriction if DTC reasonably determined that its
imposition of the Restriction was based on a clerical mistake.
5. Section 5: Clarification and Limitation of Scope and Applicability
of Proposed Rule 33
    Section 5 of the proposed rule change clarifies the scope and
applicability of the proposed rule change. Section 5(a) specifies that
the proposed rules would not affect DTC's ability to lift or modify a
Restriction, thus preserving DTC's flexibility to release or modify a
Restriction based on the needs of DTC and its Participants. Section
5(b) clarifies that the proposed rules do not affect DTC's ability to
operationally restrict book-entry services, Deposits, or other services
in the ordinary course of business pursuant to other provisions of the
DTC Rules, as such restrictions would not constitute Restrictions under
the proposed rule change. Sections 5(c) and (d) would permit DTC to
communicate with the issuer or its transfer agent or representative, if
any, provided that substantive communications are memorialized in
writing to be included in the record for purposes of any appeal to the
Commission, and to send out a Restriction Notice prior to the
imposition of a Restriction (thus giving the issuer or its transfer
agent advance notice of the Restriction), respectively.

III. Summary of Comments Received

    The Commission received 10 comment letters in response to the
proposed rule change.\38\ One comment letter generally supports the
proposed rule change.\39\ Five comment letters by two commenters, STA
and Kesner, object to the proposed rule change.\40\ Three comment
letters from DTC respond to the objections raised by STA and
Kesner,\41\ and one comment letter does not specifically comment on any
aspect of the proposed rule change.\42\
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    \38\ See supra note 4.
    \39\ See Arnoff Letter.
    \40\ See STA Letters I, II, and III and Kesner Letters I and II.
    \41\ See DTC Letters I and II.
    \42\ See Deyet Letter.
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A. Supporting Comment

    One commenter generally endorses the proposed rule change, stating
that the proposed procedures for fair notice and opportunity to
challenge would

prevent and mitigate harm to both issuers and innocent
shareholders.\43\
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    \43\ See Arnoff Letter.
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B. Objecting Comments

    STA and Kesner express general concerns with DTC, which STA and
Kesner claim functions as a monopoly in the clearance and settlement of
securities, exercising discretion to deny access to its services.\44\
More specifically, STA and Kesner argue that the proposed rule change
is inconsistent with Section 17A(b)(3)(F) of the Act because it is not
designed to protect investors and the public interest, and that it is
inconsistent with Section 17A(b)(3)(H) of the Act because the
procedures for notice of and opportunity to challenge restrictions
imposed by DTC are not fair.\45\
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    \44\ STA Letter I at 1; Kesner Letter I at 1.
    \45\ See id.
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1. The Proposed Rule Change is Not Designed To Protect Investors and
Public Interest as Required by Section 17A(b)(3)(F) of the Act
    STA and Kesner argue that the proposed rule change is inconsistent
with the Act for the following reasons: (i) The proposed basis for the
imposition of Restrictions is vague and discretionary and inconsistent
with the intent of Section 19 of the Exchange Act; (ii) the proposed
basis for imposition of Restrictions would hurt issuers and
shareholders; and (iii) Congress did not intend for DTC to be a fraud
regulator. Each argument is discussed below.
(i) Proposed Basis for Imposition of Restrictions Is Vague and
Discretionary and Inconsistent With the Intent of Sections 17A and 19
of the Act and Rule 19b-4 Thereunder
    Commenters were generally supportive of the proposed basis for
imposing Restrictions under Sections 1(a), (b), and (c) of the proposed
rule change,\46\ but some commenters raise objections to Section 1(d)
of the proposed rule change. Specifically, STA asserts that the
authority to impose Restrictions under Section 1(d) of the proposed
rule change is overly broad, arbitrary, permits DTC to exercise
unfettered discretion, and would allow DTC to take action without any
real evidence of the likelihood of actual harm or violation of
objective standards.\47\ STA further claims that the authority to
impose Restrictions under Section 1(d) is so vague that the Commission
has no way of knowing whether DTC is attempting to regulate matters not
related to (i) the purposes of Section 17A of the Act, (ii) the
administration of the clearing agency, or (iii) consistent with the
requirements of the Act, as required by Sections 17A(b)(3)(F) and
19(b)(2)(C) of the Act.\48\ Likewise, STA states that the authority to
impose Restrictions under Section 1(d) of the proposed rule change is
inconsistent with the intent of Section 19 of the Act and Rule 19b-4
thereunder, which encourages transparency by requiring a clearing
agency to seek approval of a stated policy, practice, or
interpretation.\49\ Therefore, STA argues that the proposal is contrary
to the openness envisioned by Congress.\50\
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    \46\ See, e.g., Kesner states that the basis for imposing
Restrictions under Sections 1(a), (b), and (c) of the proposed rule
change is consistent with the approach of DTC being directed by a
regulator or court. Kesner Letter I at 6. Meanwhile, STA states that
it applauds the certainty afforded by the Sections 1(a), (b), and
(c) of the proposed rule change. See STA Letter I at 3.
    \47\ STA Letter I at 1-3; see also STA Letter II at 2.
    \48\ STA Letter III at 2.
    \49\ Id.
    \50\ Id.
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    Similar to STA, Kesner expresses concern that Section 1(d) of the
proposed rule change would give authority to DTC to impose Restrictions
merely upon the initiation of an investigation or enforcement
proceeding where it concludes a threat is imminent requiring immediate
action.\51\ Kesner states that the Commission has not directed DTC to
adopt rules to protect DTC or DTC's financial institution owners and
DTC has not articulated how exercising discretionary authority
satisfies its obligation for a fair process.\52\
---------------------------------------------------------------------------

    \51\ Kesner Letter I at 6.
    \52\ Kesner Letter I at 2, 3; Kesner Letter II at 1.
---------------------------------------------------------------------------

    According to Kesner, DTC's previous imposition of Restrictions, in
many cases, were only based upon ``flimsy legal footing, notice of
commencement of an investigation or inquiry, anecdotal observations or
even unproven news stories.'' \53\ Kesner states that the proposed rule
change does not address the ``unfortunate results that befall innocents
caught up by a [Restriction], nor the immensity of the costs and
burdens placed on issuers and investors seeking to clear a
[Restriction].'' \54\ Kesner states that small issuers do not have the
resources to defend themselves and even with the potential of an appeal
Restrictions cause irreparable damage.\55\ Rather, the imposition of
Restrictions would best be left to exchanges and other ``regulatory
bodies'' that have sufficient resources and could direct DTC to impose
a service restriction when warranted.\56\
---------------------------------------------------------------------------

    \53\ Kesner Letter I at 2.
    \54\ Id. at 2, 3; Kesner Letter II at 1.
    \55\ Kesner Letter I at 2.
    \56\ Id. at 6.
---------------------------------------------------------------------------

(ii) Proposed Basis for Imposition of Restrictions Would Hurt Issuers
and Shareholders
    STA contends that the proposed rule change was not a ``good faith
attempt'' by DTC to comply with the Commission's order in IPWG and is
inconsistent with Section 17A(b)(3)(F) of the Act \57\ because
imposition of Restrictions would hurt issuers and innocent
investors.\58\ Specifically, STA asserts that the authority to impose
Restrictions under Section 1(d) of the proposed rule change should
balance the effect of DTC's actions on innocent shareholders because a
Restriction could have a devastating effect on investors and could
cause trading in the shares of an issuer to come to a virtual stop.\59\
Therefore, innocent investors may find that their shares are virtually
valueless during the period the Restriction is in place.\60\
---------------------------------------------------------------------------

    \57\ 15 U.S.C. 78q-1(b)(3)(F).
    \58\ STA Letter I at 3. STA Letter III at 2.
    \59\ STA Letter III at 2.
    \60\ Id.
---------------------------------------------------------------------------

(iii) Congress Did Not Intend DTC To Be a Fraud Regulator
    STA states that the proposed rule change is inconsistent with
Section 17A(b)(3)(F) of the Act \61\ because Congress did not intend
DTC to act as a fraud regulator or to enforce laws unrelated to
clearance and settlement.\62\ Specifically, STA asserts that the
authority to impose Restrictions under Section 1(d) of the proposed
rule change is inconsistent with Section 17A(b)(3)(F) of the Act,\63\
which requires, among other things, that the rules of the clearing
agency are not designed to regulate by virtue of any authority
conferred by the Act matters not related to the purposes of Section 17A
of the Act or the administration of the clearing agency.\64\ STA states
that the authority for fraud regulation is conferred under other
sections of the Act on the Commission and different self-regulatory
organizations with respect to their members.\65\ Thus, STA contends
that DTC does not have the authority to implement the proposed rule
change.\66\
---------------------------------------------------------------------------

    \61\ 15 U.S.C. 78q-1(b)(3)(F).
    \62\ STA Letter III at 2.
    \63\ 15 U.S.C. 78q-1(b)(3)(F).
    \64\ STA Letter III at 2.
    \65\ Id.
    \66\ Id.

---------------------------------------------------------------------------

2. The Proposed Rule Change Does Not Provide Fair Procedure With
Respect to Restrictions Imposed by DTC as Required by Section
17A(b)(3)(H) of the Act
    Commenters object to the proposed rule change on the basis that
they do not believe that it is consistent with either Section
17A(b)(3)(H) of the Act \67\ or the Commission's order in IPWG. First,
Kesner argues that DTC cannot be ``fair'' and cannot satisfy the
requirements set forth in IPWG if DTC sets its own standards and acts
on its own accord to impose a Restriction not directed by a traditional
regulator or court because DTC does not have the resources, technical
expertise, or ``commitment to fairness'' to undertake such an expansive
role in the substantive regulation of securities issuers or to become a
``super-gatekeeper.'' \68\
---------------------------------------------------------------------------

    \67\ 15 U.S.C. 78q-1(b)(3)(H).
    \68\ Kesner Letter I at 2, 4-5; Kesner also stated that the
Commission has not ``direct[ed] DTC to adopt[ ] rules to protect DTC
or DTC's financial institution owners and DTC has not articulated
how exercising discretionary authority satisfies its obligation for
a fair process.'' Kesner Letter II at 1; see also STA Letter II at
3; STA Letter III at 2.
---------------------------------------------------------------------------

    Second, Kesner states that DTC's imposition of Restrictions under
Section 1(d) of the proposed rule change, if approved, should include
specific methods by which an issuer can successfully appeal and require
DTC to remove the Restriction (or provide for automatic removal after a
short period) that are fair and reasonable and that do not burden
smaller issuers with excessive costs or delays during the denial of the
DTC's essential services.\69\ Kesner argues that to do otherwise would
hurt innocent investors and shareholders.\70\
---------------------------------------------------------------------------

    \69\ Kesner Letter I at 6.
    \70\ Id.
---------------------------------------------------------------------------

    Third, STA contends that Section 3 of the proposed rule change as
originally proposed (i.e., before DTC filed Amendment 1) was
procedurally deficient because there were no time periods specified in
the proposed rule change for the DTC Review Officer's review to be
completed. Thus, in some cases issuers and investors could be harmed
for an indefinite period while waiting for DTC to reach a decision.\71\
Specifically, STA asserts that DTC should limit its Restriction, under
Section 1(d) of the proposed rule change, to only a single 10-day
period, with any ``fair process'' occurring during that 10-day
Restriction.\72\ DTC could resolve concerns based on a
``misunderstanding'' or inform the Commission or FINRA of its concerns,
allowing either organization to take further action to protect DTC, its
Participants, or investors from the imminent harm.\73\ STA also asserts
that notice of a Restriction should occur prior to or, at least,
contemporaneously with imposition of the Restriction, particularly in
the case of a Restriction imposed based on DTC's assessment of imminent
harm, under Section 1(d) of the proposed rule change, not three days
after the Restriction is imposed.\74\
---------------------------------------------------------------------------

    \71\ STA Letter I at 4.
    \72\ Id.
    \73\ Id. at 4.
    \74\ STA Letter I at 4.
---------------------------------------------------------------------------

    Fourth, STA expresses concern that the Review Officer tasked with
reviewing a Restriction Response could be located in an office near the
person that imposed the Restriction, could have been involved in
imposing the Restriction, and could be charged with overturning the
decision made by a colleague.\75\ Similarly, Kesner questions the
independence of the Review Officer and asserts that IWPG requires that
appeals should be heard by parties independent of DTC and suggests that
``representatives of the securities bar, [STA], transfer agents,
clearing and settlement firms, auditors, and business people, under the
guidance of the DTC General Counsel, should constitute the panel of
hearing officers making recommendations for imposition and removal of
[Restrictions], continuations and appeals whenever DTC acts.'' \76\
---------------------------------------------------------------------------

    \75\ Id.
    \76\ Kesner Letter II at 2.
---------------------------------------------------------------------------

    Finally, commenters raise other points that either did not pertain
to the proposed rule change, or did not suggest how such issues would
make the proposed rule change inconsistent with the Act.\77\ As such,
those points are beyond the scope of the proposed rule change and,
therefore, are not further summarized or discussed in this order.
---------------------------------------------------------------------------

    \77\ Examples of points raised by the commenters about the
proposed rule change that did not address whether the proposed rule
change is or is not consistent with the Act include STA stating that
the proposal should also apply to transfer agents seeking initial
access to DTC's facilities (STA Letter I at 4), and Kesner stating
that (i) the Commission should not act on the proposal without
specific comments from major exchanges and OTCLink regarding
coordination with DTC and the Commission concluding that DTC's
actions under the proposal would not interfere with the objectives
of exchanges and other regulators and not hamper the functioning of
the markets; (ii) DTC would need to give up its immunity from
lawsuits in order for there to be a potentially fair process in the
imposition and appeal of Restrictions; (iii) investors should have
standing to appeal a Restriction; and (iv) the Commission should
require DTC to undertake a study and submit all of its statistics
surrounding Restrictions. Kesner Letter I at 4, 6; Kesner Letter II
at 3. Similarly, Arnoff asserted that the proposal should clarify
that DTC should not be immune from civil liability, particularly if
DTC cannot establish that it acted in good faith and with reasonable
judgment, because DTC is not acting in a governmental capacity in
the settlement and clearance process. Arnoff Letter. Moreover,
Arnoff stated that because DTC is not infallible and the risk of
error always exists, DTC should be required to purchase ``errors and
omissions insurance'' to protect innocent issuers and investors and
to add an ``additional dimension of loss prevention.'' Arnoff
Letter.
---------------------------------------------------------------------------

C. DTC's Response

    As discussed more fully below, DTC argues that the proposed rule
change is consistent with the Act in that it is consistent with Section
17A(b)(3)(F) of the Act because it is designed to protect investors and
the public interest, and it provides fair procedures as required by
Section 17A(b)(3)(H) of the Act.
1. The Proposed Rule Change Is Designed To Protect Investors and the
Public Interest as Required by Section 17A(b)(3)(F) of the Act
(i) Response to Comments That the Proposed Basis for Imposition of
Restrictions Is Vague and Discretionary and Inconsistent With the
Intent of Sections 17A and 19 of the Act and Rule 19b-4 Thereunder
    In response to STA's comment that the basis for imposition of
Restrictions under the proposed rule change is vague, DTC asserts that
Sections 1(a)-(c) of the proposed rule change provide specific,
objective trigger events for imposing Restrictions and would be the
primary focus of the Restriction program going forward.\78\ Further,
while DTC acknowledges that it cannot anticipate each circumstance
under which immediate action could be needed under Section 1(d) to
prevent harm to DTC or its Participants,\79\ it provides specific
examples of such circumstances, including: (i) If DTC receives
information from an authorized officer of the issuer that another
company has usurped the identity of the company and issued unauthorized
shares; (ii) if DTC has corroborated and plausible information that
forged securities are being deposited at DTC; (iii) a foreign
regulatory authority raises credible concerns about an Eligible
Security; or (iv) there is a material recordkeeping issue that raises
questions about the Eligibility of a specific security.\80\ DTC also
asserts that STA's position that the Commission should not approve the
proposed rule change if it includes Section 1(d) would deny DTC the
flexibility to impose Restrictions that could be necessary to avoid
imminent harm to DTC or its Participants,\81\ thereby subjecting DTC
and its Participants to significant

potential harm. DTC states that it needs such flexibility to protect
itself and its Participants from an imminent harm that may not warrant
or be covered by a trading halt or suspension.\82\
---------------------------------------------------------------------------

    \78\ DTC Letter I at 2.
    \79\ DTC Letter I at 3; DTC Letter III at 3.
    \80\ DTC Letter III at 3.
    \81\ Id. at 2; DTC Letter III at 3.
    \82\ DTC Letter I at 3; DTC Letter III at 3.
---------------------------------------------------------------------------

    In response to Kesner's comment that Section 1(d) of the proposed
rule change would give authority to DTC to impose Restrictions merely
upon the initiation of an investigation or enforcement proceeding where
DTC concludes a threat is imminent and requires immediate action, DTC
asserts that the Commission recognized in In re Atlantis Internet Group
(``Atlantis'') \83\ and IPWG that DTC has such authority and that it is
critical to the self-regulatory function of DTC to retain discretion to
avert imminent harm, including the discretion to take action before
providing notice to the issuer, if necessary.\84\ DTC states that
Section 1(d) of the proposed rule change would be used only for urgent
situations and exercised rarely, such as in the example scenarios
listed above.\85\
---------------------------------------------------------------------------

    \83\ Atlantis, Securities Exchange Act Release. No. 75168 at 7-
8, 2015 SEC LEXIS 2394 (June 12, 2015) (Admin. Proc. File No. 3-
15432).
    \84\ DTC Letter I at 3; DTC Letter II at 2.
    \85\ DTC Letter III at 3.
---------------------------------------------------------------------------

(ii) Response to Comments That the Proposed Basis for Imposition of
Restrictions Would Hurt Issuers and Shareholders
    DTC states, generally, that the proposed rule change would assure
the safeguarding of securities by providing a mechanism for DTC to act
quickly and efficiently to screen out prior to deposit, or restrict
after deposit, securities that pose an imminent harm to DTC or its
Participants, or for which trading has been prohibited by a court or
applicable regulator.\86\ Specifically, DTC states that Sections 1(a)
and (b) of the proposed rule change provide objective trigger events
for imposing Restrictions when the Commission imposes a trading
suspension or FINRA impose a trading halt.\87\ DTC explains that,
although trading activity takes place outside of DTC, DTC provides a
settlement location for market traders or other transfers of interests
in securities.\88\ Thus, absent a DTC Restriction, other book-entry
transfers might continue (e.g., pledges, repos, or securities lending),
notwithstanding a Commission suspension or FINRA halt.\89\ A
Restriction would freeze these Participant activities, which DTC
believes would further the regulatory purpose of the Commission
suspension or FINRA halt.\90\
---------------------------------------------------------------------------

    \86\ See Notice, 81 FR 37235.
    \87\ DTC Letter III at 2.
    \88\ Id.
    \89\ Id.
    \90\ Id.
---------------------------------------------------------------------------

    Further, DTC emphasizes that it would not impose a Restriction if
DTC believes that the suspension or halt does not implicate concerns
that DTC believes should lead to a Restriction.\91\ For example, under
Section 1 of the proposed rule change, DTC could decline to impose a
Global Lock if (i) in the case of a FINRA halt, if the reason for the
halt is to pause the market to give market participants time to assess
news of a pending event that may affect the security's price; or (ii)
in the case of a Commission suspension, if the sole reason for the
suspension is the lack of current and accurate information about the
company because it failed to file certain periodic reports with the
Commission.\92\
---------------------------------------------------------------------------

    \91\ Id. at 2, 3.
    \92\ Id. at 3.
---------------------------------------------------------------------------

    With respect to Section 1(d) of the proposed rule change, DTC
asserts that it believes that Section 1(d) is consistent with the Act
because it would provide DTC with the flexibility it needs to protect
its fungible bulk, which it holds on behalf of its Participants, from
imminent harm that could arise from circumstances that would neither
justify nor be affected by a trading halt or suspension,\93\ while
still providing sufficient notice of the types of circumstances that
could trigger a Restriction under Section 1(d). DTC also reiterates
that it does not anticipate imposing Restrictions pursuant to Section
1(d) of the proposed rule change frequently,\94\ and has provided
specific examples of circumstances under which imminent harm could
arise in the future, as described above.\95\
---------------------------------------------------------------------------

    \93\ DTC Letter I at 2; DTC Letter III at 3.
    \94\ DTC Letter III at 3.
    \95\ Id.
---------------------------------------------------------------------------

(iii) Response to Comments That DTC Would Be Acting as a Fraud
Regulator
    In response to comments that Congress did not intend DTC to act as
a fraud regulator or to enforce laws unrelated to clearance and
settlement, DTC asserts that Sections 1(a)-(c) of the proposed rule
change would further the regulatory purpose behind a Commission, FINRA,
or court action by stopping the flow of questionable securities in
other book-entry transfers that may continue despite other regulatory
action.\96\
---------------------------------------------------------------------------

    \96\ Id. at 2, 3.
---------------------------------------------------------------------------

    With respect to Section 1(d), DTC states that there are situations
that would require DTC to impose a Restriction that might not require a
Commission suspension or FINRA halt.\97\ For instance, DTC could impose
a Restriction (i) if DTC receives information from an authorized
officer of the issuer that another company has usurped the identity of
the company and issued unauthorized shares; (ii) if DTC has
corroborated and plausible information that forged securities are being
deposited at DTC; (iii) a foreign regulatory authority raises credible
concerns about an eligible security; or (iv) there is a material
recordkeeping issue that raises questions about the eligibility of a
specific security. The Commission also notes that, as discussed below,
a Restriction could be necessary to prevent DTC's services from being
used to facilitate an unregistered distribution or other violation of
the securities laws.
---------------------------------------------------------------------------

    \97\ Id. at 3.
---------------------------------------------------------------------------

2. The Proposed Rule Change Does Provide Fair Procedure With Respect to
Restrictions Imposed by DTC on Access to Its Book-Entry Services by
Issuers and Shareholders as Required by Section 17A(b)(3)(H) of the Act
    DTC states that the proposed rule change is consistent with Section
17A(b)(3)(H) of the Act \98\ and IPWG. Specifically, in response to
STA's and Kesner's comments that the proposed rule change does not
provide for fair procedures nor satisfy the requirements of IPWG, DTC
highlights that the Commission's decisions in both Atlantis and IPWG
\99\ recognize that DTC must retain discretion to avert imminent harm,
including the discretion to take action before providing notice to the
issuer, if necessary.\100\
---------------------------------------------------------------------------

    \98\ 15 U.S.C. 78q-1(b)(3)(H).
    \99\ Atlantis, 2015 SEC LEXIS 2394 at *7, 8.
    \100\ DTC Letter I at 3.
---------------------------------------------------------------------------

    In response to STA's specific claim that the proposal is
procedurally deficient because it lacks a stated time period for the
Review Officer to complete the review, DTC submitted Amendment No.1 to
Section 3 of the proposed rule change, which, as described above,
establishes a 10 business-day deadline, with limited extension, for the
Review Officer to complete its review of the Restriction Response and
for DTC to provide a Restriction Decision.\101\
---------------------------------------------------------------------------

    \101\ Prior to filing Amendment No. 1, DTC also contended in its
first response letter that a reasonable review by the Review Officer
in a timely manner is implicit in the proposed process, recognizing
that DTC is bound to perform a prompt review, and to do otherwise
may conflict with its obligations under Section 17A of the Act. DTC
Letter I at 4; 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    Similarly, in response to both STA's and Kesner's comments that
Restrictions imposed under Section 1(d) of the

proposed rule change should be automatically removed after a short
period or expire after 10 days, DTC states that it would not be
effective, reasonable, or practical for DTC to premise its proposed
rule change on the assumption that the Commission or FINRA would or
could take action quickly enough to protect DTC, its Participants, or
investors.\102\ DTC explains further that imminent harm to DTC or its
Participants could arise from circumstances that may not be addressed
by or may not justify a trading halt or suspension, such as the
impending deposit of illegally distributed securities at DTC.\103\ DTC
also reiterates that it does not anticipate imposing Restrictions
pursuant to Section 1(d) of the proposed rule change frequently.\104\
---------------------------------------------------------------------------

    \102\ DTC Letter I at 3; see also DTC Letter II at 2.
    \103\ Id.
    \104\ Id.
---------------------------------------------------------------------------

    In response to STA's and Kesner's comments on the independence of
the Review Officer, and STA's comment that notice of a Restriction
should be at least contemporaneously with the imposition of the
Restriction, DTC states that it believes the proposed rule change is
sufficiently clear to require that the Review Officer not be conflicted
and that the Review Officer's decision would be unbiased and
independent,\105\ and that both Atlantis and IPWG recognize that DTC
must retain discretion to take action before providing notice to the
issuer, if necessary.\106\
---------------------------------------------------------------------------

    \105\ DTC Letter I at 4.
    \106\ Id. at 3.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act directs the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
such proposed rule change is consistent with the requirements of the
Act and rules and regulations thereunder applicable to such
organization.\107\ After carefully considering the proposed rule
change, the comments received, and DTC's responses thereto, the
Commission finds that the proposed rule change, as modified by
Amendment No. 1, is consistent with the requirements of the Act and the
rules and regulations thereunder applicable to DTC. In particular, the
Commission finds that the proposed rule change is consistent with
Sections 17A(b)(3)(F) and 17A(b)(3)(H) of the Act, as discussed in
detail below.
---------------------------------------------------------------------------

    \107\ 15 U.S.C. 78s(b)(2)(C).
---------------------------------------------------------------------------

A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of the clearing agency are designed to assure the
safeguarding of securities in the custody or control of the clearing
agency and, in general, protect investors and the public interest.\108\
---------------------------------------------------------------------------

    \108\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Sections 1(a) and (b) of the proposed rule change, respectively,
would authorize DTC to impose a Global Lock where FINRA has issued an
order for the halt of trading of an Eligible Security or the Commission
has issued an order for the suspension of trading of an Eligible
Security. Section 1(c) of the proposed rule change would authorize DTC
to impose a Restriction when ordered to do so by a court of competent
jurisdiction. In such a situation, DTC would impose the Restriction
specified by the court, or a Global Lock if no Restriction was
specified. As noted above, commenters are generally supportive of the
proposed basis for imposing Restrictions under Sections 1(a), (b), and
(c) of the proposed rule change.\109\ A halt, suspension, or court
order would raise questions as to whether the security at issue would
continue to meet the eligibility criteria set forth in DTC's Rules. The
Commission therefore agrees that DTC should have the authority under
its Rules to place a Restriction on such securities if doing so will
help prevent potentially ineligible securities from tainting DTC's
fungible bulk, thereby protecting DTC and DTC's Participants from
facilitating wrongful activities, and investors from having Eligible
Securities tainted by securities of the same issue that do not meet
DTC's eligibility criteria. The Commission also agrees that providing
DTC with authority to impose a Restriction on securities that are the
subject of a FINRA halt or Commission suspension would help protect
investors and possibly stop further wrongdoing, because the Restriction
would stop deliveries, redemptions, pledges, lending, deposits, and
other types of transfers and settlements made via DTC's book-entry
services that may not be addressed by the trading halt or suspension.
---------------------------------------------------------------------------

    \109\ See supra Section III.B.1.i at note 46.
---------------------------------------------------------------------------

    The proposed rule change would provide DTC the discretion to not
impose a Global Lock, even if FINRA or the Commission issued a halt or
suspension of trading of an Eligible Security, if such a Restriction
would not further the regulatory purpose of the halt or suspension. For
example, if a halt or suspension was imposed for a reason unrelated to
the eligibility of the security for DTC's book-entry services,\110\ DTC
would not be required to impose a Restriction. This provision protects
issuers and investors from the burdens of unnecessary Restrictions by
providing DTC with flexibility to avoid imposing a Global Lock if doing
so would not be in the interest of protecting DTC, DTC's Participants,
issuers, or investors.
---------------------------------------------------------------------------

    \110\ For example, DTC states that it would not impose a
Restriction where an alleged improper issuance of shares were
deposited at DTC several years earlier, or the chief executive
officer of a company was convicted of a corporate crime that had no
apparent effect on the eligibility of the company's securities at
DTC. DTC Letter III at 4.
---------------------------------------------------------------------------

    Section 1(d) of the proposed rule change would authorize DTC to
impose a Restriction upon identifying or becoming aware of a need to
take such action to avoid imminent harm, injury, or other such material
adverse consequence to DTC or its Participants that could arise from
further deposits of, or continued book-entry services to, a particular
Eligible Security. As described above, commenters generally raise three
objections to Section 1(d): (i) Section 1(d) is impermissibly vague,
thereby granting DTC unfettered discretion to impose Restrictions under
it; (ii) issuers and investors would be harmed by Restrictions imposed
under this provision, including because it would stop all book-entry
services for that security, possibly affecting the value of the
security; \111\ and (iii) by exercising its discretion under Section
1(d), DTC would be improperly acting as a fraud regulator. With respect
to the first objection, one commenter also states that the need to
impose a Restriction under Section 1(d) of the proposed rule change
should be balanced with the interests of shareholders of the
security.\112\
---------------------------------------------------------------------------

    \111\ STA Letter III at 2.
    \112\ Id.
---------------------------------------------------------------------------

    The Commission does not find that Section 1(d) of the proposed rule
change is impermissibly vague, or that it would grant DTC unfettered
discretion to impose Restrictions without a proper basis or adequate
protections for issuers. First, Section 1(d) is not impermissibly vague
because it establishes specific criteria for imposing a Restriction and
would require DTC to meet a high standard before it would be permitted
to do so under that provision. Specifically, DTC would be required to
identify (i) a need for immediate action (ii) to avert an imminent,
(iii) harm, injury, or other such material adverse consequence, (iv) to
DTC or its Participants, (v) that could arise from further deposits of,
or

continued book-entry services to, an Eligible Security. As such, DTC's
discretion to impose restrictions under Section 1(d) would be
constrained. Indeed, in light of the standards set forth in Section
1(d), DTC acknowledges that Restrictions under this section would only
be imposed in rare and exigent circumstances,\113\ where imminent harm
is present.\114\ DTC's discretion would also be limited by Section
19(g) of the Act, which requires DTC, as a registered clearing agency
and self-regulatory organization, to administer all of its rules in a
manner consistent with its obligations of compliance with the federal
securities laws and other applicable laws.\115\
---------------------------------------------------------------------------

    \113\ See DTC Letter I at 2.
    \114\ See Notice, 81 FR at 37234.
    \115\ 15 U.S.C. 78s(g).
---------------------------------------------------------------------------

    Regarding DTC's discretion under proposed Section 1(d), the
Commission agrees that it would be impossible for DTC to predict and
codify every possible circumstance that could taint DTC's fungible
bulk, and thus harm DTC, its Participants, issuers, and investors.
Without Section 1(d) of the proposed rule change, DTC would not have
the authority or discretion to impose a Restriction when a significant
concern arises that would not fall under Sections 1(a)-(c) because it
is not related to a halt, suspension, or court order.\116\ The
Commission finds that such discretion is necessary to allow DTC to
protect not only itself and its Participants, but also investors and
issuers who, but for a Restriction imposed by DTC, could be unwilling
participants in fraudulent activity, or victims of improper
conduct.\117\ For example, in the event that DTC becomes aware that all
or some portion of the fungible bulk of an Eligible Security may have
been sold or distributed in violation of Section 5 of the Securities
Act, it could be necessary for DTC to limit further deposits and/or
book-entry services for that security to prevent DTC and its
Participants from participating in or otherwise facilitating an ongoing
Section 5 violation. Without the authority and discretion granted by
proposed Section 1(d), DTC might not have the authority under its Rules
to take such action. Likewise, the discretion provided by proposed
Section 1(d) would enable DTC to protect current shareholders from
potential fraudulent deposits of securities that could compromise the
value of their securities of the same issue.
---------------------------------------------------------------------------

    \116\ For example, DTC could have a concern about a foreign
issuance, but FINRA or the Commission may not share that same
concern and may not impose a trading halt or suspension; yet, DTC
may believe it necessary to impose a Restriction to protect DTC and
its Participants. See DTC Letter III at 3.
    \117\ For example, as DTC suggests, if DTC became aware of a
current corporate hijacking, it would be able to impose a
Restriction immediately, under Section 1(d) of the proposed rule.
See DTC Letter III at 3.
---------------------------------------------------------------------------

    The Commission also does not find that the potential harm that
could be caused to issuers and investors by Restrictions imposed under
Section 1(d) outweighs the benefits to DTC, DTC's Participants,
issuers, and investors gained by permitting DTC to impose Restrictions
in the limited circumstances, and subject to the processes and
procedures, that would be established by the proposed rule change. Any
such potential harm would be mitigated not only by the issuer's ability
under the proposed rule change to challenge a Restriction with DTC, but
also by the issuer's ability to then appeal DTC's Restriction Decision
to the Commission. Further, DTC, DTC's Participants, issuers, and
investors could all be harmed if DTC did not have the authority to
impose a Restriction in the circumstances described in Sections 1(a)-
(d). Rather, the Commission finds that Section 1(d) of the proposed
rule change is necessary to provide DTC with adequate flexibility and
authority to prevent and avoid imminent harm to DTC and its
Participants, as well as issuers and investors, that could arise as a
result of unforeseen and unpredictable events outside DTC's ability to
predict or control. In addition, the Commission believes that DTC's
flexibility to impose a Restriction under Section 1(d) is appropriately
balanced with the interests of issuers and shareholders of the security
by Section 4(d) of the proposed rule change, which would require DTC to
release the Restriction when it reasonably determines that the original
basis for the Restriction has abated, and release of the Restriction
would no longer pose a threat of imminent harm, injury, or other such
material adverse consequent to DTC or its Participants.\118\
---------------------------------------------------------------------------

    \118\ See Notice, 81 FR 37234.
---------------------------------------------------------------------------

    Finally, with respect to commenters' third objection, that Section
1(d) of the proposed rule change is inconsistent with Section
17A(b)(3)(F) of the Act because Congress did not intend DTC to act as a
fraud regulator or to enforce laws unrelated to clearance and
settlement,\119\ the Commission finds that the proposed rule change is
directly related to DTC's administration of its book-entry clearing and
settlement services, which are directly related to the purposes of
Section 17A of the Act, including the establishment of the national
system for clearance and settlement of securities transactions.\120\ As
the Commission noted in both Atlantis and IPWG, one of the reasons
DTC's book-entry clearing and settlement services are fundamentally
important services is because any suspension by DTC of its clearance
and settlement services with respect to an issuer's securities means
that all trades in that issuer's stock would then require physical
transfer of the stock certificates.\121\ As the central depository of
securities in the United States, DTC has an obligation to ensure that
by allowing book-entry services on deposited shares, it is not
facilitating the illegal distribution of unregistered shares or helping
to perpetrate a fraud, in violation of Section 5 of the Securities Act.
Such actions are necessary to help assure the safeguarding of
securities in the custody or control of DTC, and, in general, protect
investors and the public interest. Further, DTC is a registered
clearing agency and self-regulatory organization under Section 19 of
the Act. As such, the Commission previously concluded in Atlantis and
IPWG that DTC has the authority to impose restrictions on its book-
entry services.\122\
---------------------------------------------------------------------------

    \119\ STA Letter III at 3.
    \120\ 15 U.S.C. 78q-1.
    \121\ Atlantis, 2015 SEC LEXIS 2394 at *7-8 n.4; IPWG, 2012 SEC
LEXIS 844 at *24.
    \122\ Atlantis, 2015 SEC LEXIS 2394 at *7-8 n.4; IPWG, 2012 SEC
LEXIS 844 at *24.
---------------------------------------------------------------------------

    Based on the above, the Commission finds that the proposed rule
change, is designed to help assure the safeguarding of securities in
the custody or control of DTC, and, in general, protect investors and
the public interest, as required by Section 17A(b)(3)(F) of the Act.

B. Consistency With Section 17A(b)(3)(H) of the Act

    Section 17A(b)(3)(H) of the Act requires, among other things, that
the rules of a clearing agency are in accordance with the provisions of
Section 17A(b)(5)(B) of the Act, and, in general, provide a fair
procedure with respect to the prohibition or limitation by the clearing
agency of any person with respect to access to services offered by the
clearing agency.\123\ Section 17A(b)(5)(B) of the Act \124\ requires
that, in any proceeding by a registered clearing agency to determine
whether a person shall be denied participation or prohibited or limited
with respect to access to services offered by the clearing agency, the
clearing agency shall notify such person of, and give that person an
opportunity to be heard, the specific

grounds for denial or prohibition or limitation under consideration and
keep a record.\125\ A determination by the clearing agency to deny
participation or prohibit or limit a person with respect to access to
services offered by the clearing agency shall be supported by a
statement setting forth the specific grounds on which the denial or
prohibition or limitation is based.\126\
---------------------------------------------------------------------------

    \123\ 15 U.S.C. 78q-1(b)(3)(H).
    \124\ 15 U.S.C. 78q-1(b)(5)(B).
    \125\ Id.
    \126\ Id.
---------------------------------------------------------------------------

    In Atlantis and IPWG, the Commission concluded that issuers are
``persons'' under Section 17A(b)(3)(H) of the Act, and, thus, are
entitled to Commission review of DTC's actions that deny or limit
issuers access to DTC services.\127\ The Commission further found that,
to comply with Section 17A(b)(3)(H) of the Act,\128\ DTC must provide
the issuer with notice of DTC's determination to impose a Restriction,
specifying the basis for DTC's action, and that DTC must also provide
an issuer with an opportunity to be heard,\129\ but that a formal
hearing is not required.\130\ The Commission stated that DTC may design
fair procedures in accordance with its own internal needs and
circumstances.\131\
---------------------------------------------------------------------------

    \127\ Atlantis, 2015 SEC LEXIS 2394 at *7, 8 n.4; IPWG, 2012 SEC
LEXIS 844 at *24.
    \128\ 15 U.S.C. 78q-1(b)(3)(H).
    \129\ Atlantis, 2015 SEC LEXIS 2394 at *7, 8 n.4; IPWG, 2012 SEC
LEXIS 844 at *24.
    \130\ Atlantis, 2015 SEC LEXIS 2394 at *19; IPWG, 2012 SEC LEXIS
844 at *30 n.36.
    \131\ Atlantis, 2015 SEC LEXIS 2394 at *19; IPWG, 2012 SEC LEXIS
844 at *24.
---------------------------------------------------------------------------

    The Commission also held in Atlantis and IPWG that if DTC believes
that circumstances exist that justify imposing a suspension of services
with respect to an issuer's securities, in advance of being able to
provide the issuer with notice and an opportunity to be heard on the
suspension, it may do so,\132\ provided that, in such circumstances,
the process to impose such a suspension should balance the identifiable
need for emergency action with the issuer's right to fair procedures
under Section 17A(b)(3)(H) of the Act.\133\ Under such procedures, DTC
would be authorized to act to avert an imminent harm, but it could not
maintain such a suspension indefinitely without providing expedited
fair process to the affected issuer.\134\
---------------------------------------------------------------------------

    \132\ Atlantis, 2015 SEC LEXIS 2394 at *18 n.9; IPWG, 2012 SEC
LEXIS 844 at *29.
    \133\ 15 U.S.C. 78q-1(b)(3)(H); Atlantis, 2015 SEC LEXIS 2394 at
*18 n.9; IPWG, 2012 SEC LEXIS 844 at *29.
    \134\ Atlantis, 2015 SEC LEXIS 2394 at *18 n.9; IPWG, 2012 SEC
LEXIS 844 at *29.
---------------------------------------------------------------------------

    The Commission finds that the proposed rule change appropriately
addresses the Commission's findings in IPWG and Atlantis by, among
other things, limiting Restrictions primarily to circumstances in which
there would be objective external criteria for the Restriction of which
the issuer would clearly be on notice (i.e., a FINRA halt, Commission
suspension, or Court order under Sections 1(a)-(c)), or where the
Restriction would be necessary to avoid a specific imminent harm to DTC
or one or more of DTC's Participants. Sections 2 and 3 of the proposed
rule change would establish a clear, unambiguous framework for
providing issuers with notice of a Restriction and an opportunity to be
heard and object to the Restriction, as well as DTC's obligations to
review and provide a response to any such objection. Under Section 2(a)
of the proposed rule change, DTC would be required to provide the
issuer with notice of a Restriction within three business days after
imposition of the Restrictions. The Restriction Notice would be
required to set forth with reasonable specificity (i) the basis for the
Restriction; (ii) the date the Restriction was imposed; and (iii) the
timing and procedural requirements for the issuer to object to the
Restriction. The issuer would be permitted to submit a Restriction
Response to DTC within 20 business days of receiving the Restriction
Notice, setting forth its objection to the Restriction and detailing
the reasons that the Restriction should be released pursuant to Section
4(d). Under Section 3 of the proposed rule change, DTC would then have
10 business days to provide the issuer with a Restriction Decision,
which would be required to be made by an independent Review Officer,
defined as an officer of DTC under DTC's By-Laws. Under Section 3(b) of
the proposed rule change, in response to the Restriction Decision, the
issuer would be permitted to submit a Supplement within 10 business
days to establish that DTC made a clerical mistake or an oversight in
reviewing the Restriction Response. Finally, DTC would be required to
provide the issuer with a Supplement Decision within 10 business days
of receiving the Supplement.
    As described above, commenters' concerns with the notice and
objection procedures that would be established by the proposed rule
change were as follows: (i) The proposed rule change could not be fair
and could not satisfy the requirements set forth in IPWG if DTC is
permitted to set its own standards and act on its own accord to impose
a Restriction under Section 1(d) of the proposed rule change; \135\
(ii) DTC should limit any Restriction under Section 1(d) of the
proposed rule change to only a single 10 day period with any fair
process occurring during that 10 day period; \136\ and (iii) questions
regarding whether the Review Officer would be sufficiently
independent,\137\ including an assertion by one commenter that IPWG
requires that appeals should be heard by parties independent of
DTC.\138\ In addition, one commenter asserted that the proposed rule
change fails to establish fair procedures as required by Section
17A(b)(3)(H) of the Act and the Commission's decision in IPWG because
there is no stated time period for the Review Officer to complete its
review of the issuer's Restriction Response and issue a Restriction
Decision.\139\ This comment is obviated by DTC's Amendment No. 1 to the
proposed rule change,\140\ which modified the initial proposed rule
change to add a 10 business-day time period for the Review Officer to
complete the review and issue a Restriction Decision.
---------------------------------------------------------------------------

    \135\ Kesner Letter at 6.
    \136\ STA Letter I at 3.
    \137\ See, e.g., STA Letter I at 4
    \138\ Kesner Letter II at 2.
    \139\ STA Letter I at 3.
    \140\ See Securities Exchange Act Release No. 78774 (September
6, 2016), 81 FR 62775 (September 12, 2016).
---------------------------------------------------------------------------

    The Commission believes that the limited discretion provided to DTC
under Section 1(d) of the proposed rule change does not render the
proposed rule change unfair or unable to satisfy the requirements of
Section 17A(b)(3)(H) of the Act and the Commission's decision in IPWG.
As the Commission previously articulated in IPWG, DTC may design fair
procedures in accordance with its own internal needs and
circumstances.\141\ Similarly, if DTC believes that circumstances exist
that justify imposing a Restriction, even in advance of notifying the
issuer of the Restriction, it may do so, as long as DTC's process for
imposing the emergency Restriction balances the identifiable need with
the issuer's right to fair procedures under the Act.\142\ Here, as
discussed above, Section 1(d) strikes the appropriate balance between
providing DTC with sufficient flexibility to address unforeseen harms
and issuers and investors rights with respect to their securities. It
also establishes a high standard for imposing a Restriction, and DTC's
discretion under that provision is limited.
---------------------------------------------------------------------------

    \141\ 2012 SEC LEXIS 844 at *30 n.36.
    \142\ Id. at *32.
---------------------------------------------------------------------------

    Further, although Section 1(d) of the proposed rule change would
authorize DTC to impose a Restriction to avert an imminent harm, DTC
could not maintain the Restriction indefinitely without providing
expedited fair

process to the affected issuer under Sections 2 and 3 of the proposed
rule change. Further, to impose a Restriction under Section 1(d) of the
proposed rule change, DTC would be required to identify or become aware
of the need to avoid an imminent harm that could arise from further
deposits or book-entry services, and would be required to provide the
issuer notice and opportunity to appeal the Restriction pursuant to the
specific procedures set forth in Sections 2 and 3 of the proposed rule
change. As described above, these procedures establish a process to
require DTC to promptly notify the issuer of a Restriction and give the
issuer an opportunity to be heard upon the specific grounds for the
Restriction, all within specified periods of time.
    With respect to the independence of the Review Officer, Section 3
of the proposed rule change requires an officer of DTC, as defined in
DTC's By-Laws, who did not have responsibility for the initial
imposition of the Restriction, to review the Restriction Response and
provide the Restriction Decision to the issuer. As the Commission
previously articulated in IPWG, DTC may comply with the Act by
designing fair procedures in accordance with its own internal needs and
circumstances.\143\ The Commission finds that having a DTC officer who
was not involved in imposing the Restriction review a Restriction
Response is a fair procedure. This is consistent with similar
procedures by other clearing agencies supervised by the Commission. For
instance, the Commission has approved as a fair procedure the Options
Clearing Corporation's (``OCC's'') use of a panel of OCC officers and a
director of OCC in the review of suspension decisions.\144\
---------------------------------------------------------------------------

    \143\ 2012 SEC LEXIS 844 at *30 n.36.
    \144\ See Rule 1110, OCC Rules, available at http://www.optionsclearing.com/components/docs/legal/rules_and_bylaws/occ_rules.pdf.
---------------------------------------------------------------------------

    The Commission believes that the proposed rule change establishes
clear, consistent, and fair procedures for the imposition of
Restrictions and for providing issuers with notice of Restrictions and
opportunity to be heard. Section 1 identifies the specific
circumstances under which a Restriction will be imposed, Sections 2 and
3 would establish clear, policies, procedures, and specific
requirements for providing issuers with notice of Restrictions and an
opportunity to be heard, and Section 4 of the proposed rule change
would establish clear standards for determining when adequate exists to
release a Restriction. The Commission therefore finds that the proposed
rule change, as modified by Amendment No. 1, provides for fair
procedures with respect to the prohibition or limitation by the
clearing agency of any person with respect to access to services
offered by the clearing agency, as required by Section 17A(b)(3)(H) of
the Act.

V. Conclusion

    On the basis of the foregoing, the Commission finds that the
proposal, as modified by Amendment No. 1, is consistent with the
requirements of the Act and in particular with the requirements of
Section 17A of the Act \145\ and the rules and regulations thereunder.
---------------------------------------------------------------------------

    \145\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that proposed rule change SR-DTC-2016-003, as modified by Amendment No.
1, be, and hereby is, Approved.\146\
---------------------------------------------------------------------------

    \146\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\147\
---------------------------------------------------------------------------

    \147\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-29668 Filed 12-9-16; 8:45 am]
 BILLING CODE 8011-01-P


[Federal Register Volume 76, Number 227 (Friday, November 25, 2011)]
[Notices]
[Page 72699]
[FR Doc No: 2011-30374]

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. EL12-10-000]

PJM Interconnection, LLC; Notice of Petition for Declaratory
Order

    Take notice that on November 9, 2011, pursuant to Rule 207(a)(2) of
the Rules of Practice and Procedure of the Federal Energy Regulatory
Commission (Commission), 18 CFR 385.207(a)(2) (2011), PJM
Interconnection, LLC (PJM) filed a Petition for Declaratory Order,
seeking a declaratory order to resolve uncertainty regarding how PJM
should recover from its members the costs allocated to PJM pursuant to
the Commission's December 30, 2010 order in Midwest Independent
Transmission System Operator, Inc., 133 FERC ] 61, 275 (2010) in Docket
No. ER11-1844.
    Any person desiring to intervene or to protest this filing must
file in accordance with Rules 211 and 214 of the Commission's Rules of
Practice and Procedure (18 CFR 385.211, 385.214). Protests will be
considered by the Commission in determining the appropriate action to
be taken, but will not serve to make protestants parties to the
proceeding. Any person wishing to become a party must file a notice of
intervention or motion to intervene, as appropriate. The Respondent's
answer and all interventions, or protests must be filed on or before
the comment date. The Respondent's answer, motions to intervene, and
protests must be served on the Complainants.
    The Commission encourages electronic submission of protests and
interventions in lieu of paper using the ``eFiling'' link at http://www.ferc.gov. Persons unable to file electronically should submit an
original and 14 copies of the protest or intervention to the Federal
Energy Regulatory Commission, 888 First Street NE., Washington, DC
20426.
    This filing is accessible on-line at http://www.ferc.gov, using the
``eLibrary'' link and is available for review in the Commission's
Public Reference Room in Washington, DC. There is an ``eSubscription''
link on the web site that enables subscribers to receive email
notification when a document is added to a subscribed docket(s). For
assistance with any FERC Online service, please email
<EMAIL_ADDRESS>or call<PHONE_NUMBER> (toll free). For
TTY, call<PHONE_NUMBER>.
    Comment Date: 5 p.m. Eastern Time on December 2, 2011.

    Dated: November 17, 2011.
Kimberly D. Bose,
Secretary.
[FR Doc. 2011-30374 Filed 11-23-11; 8:45 am]
BILLING CODE 6717-01-P


[Federal Register: April 20, 2010 (Volume 75, Number 75)]
[Notices]
[Page 20604-20606]
[DOCID:fr20ap10-68]

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Food and Drug Administration

[Docket No. FDA-2010-N-0033]

Agency Information Collection Activities; Submission for Office
of Management and Budget Review; Comment Request; Postmarket
Surveillance

AGENCY: Food and Drug Administration, HHS.

ACTION: Notice.

-----------------------------------------------------------------------

SUMMARY: The Food and Drug Administration (FDA) is announcing that a
proposed collection of information has been submitted to the Office of
Management and Budget (OMB) for review and clearance under the
Paperwork Reduction Act of 1995 (the PRA).

DATES: Fax written comments on the collection of information by May 20,
2010.

ADDRESSES:  To ensure that comments on the information collection are
received, OMB recommends that written comments be faxed to the Office
of Information and Regulatory Affairs, OMB, Attn: FDA Desk Officer,
FAX:<PHONE_NUMBER>, or e-mailed to<EMAIL_ADDRESS>All
comments should be identified with the OMB control number 0910-0449.
Also include the FDA docket number found in brackets in the heading of
this document.

FOR FURTHER INFORMATION CONTACT: Daniel Gittleson, Office of
Information Management, Food and Drug Administration, 1350 Piccard Dr.,
PI50-400B, Rockville, MD 20850,<PHONE_NUMBER>, email:
<EMAIL_ADDRESS>
SUPPLEMENTARY INFORMATION: In compliance with 44 U.S.C. 3507, FDA has
submitted the following proposed collection of information to OMB for
review and clearance.

Postmarket Surveillance--21 CFR Part 822 (OMB Control Number 0910-
0449)--Extension

    Section 522(a) of the Federal Food, Drug, and Cosmetic Act (21
U.S.C. 360l) authorizes FDA to require manufacturers to conduct
postmarket surveillance (PS) of any device that meets the criteria set
forth in the statute. The PS regulation establishes procedures that FDA
uses to approve and disapprove PS plans. The regulation provides
instructions to manufacturers so they know what information is required
in a PS plan submission. FDA reviews PS plan submissions in accordance
with part 822 (21 CFR part 822) in Sec. Sec.  822.15 to 822.19 of the
regulation, which describe the grounds for approving or disapproving a
PS plan. In addition, the PS regulation provides instructions to
manufacturers to submit interim and final reports in accordance with
Sec.  822.38. Respondents to this collection of information are those
manufacturers who require postmarket surveillance of their products.

Explanation of Reporting Burden Estimate

    The burden captured in table 1 of this document for each of these
responses is based on the data available in FDA's internal tracking
system for 2009. There was not an internal tracking system prior to
2009. Sections 822.26, 822.27, and 822.34 do not constitute information
collection subject to review under the PRA because ``it entails no
burden other than that necessary to identify the respondent, the date,
the respondent's address, and the nature of the instrument.'' (5 CFR
1320.3(h)(1)).

Explanation of Recordkeeping Burden Estimate

    FDA expects that at least some of the manufacturers will be able to
satisfy the PS requirement using information or data they already have.
For purposes of calculating burden, however, FDA has assumed that each
PS order can only be satisfied by a 3-year clinically-based
surveillance plan, using three investigators. These estimates are based
on FDA's knowledge and experience with limited implementation of
section 522 under the Safe Medical Devices Act. Therefore, FDA would
expect that the recordkeeping requirements would apply to a maximum of
21 manufacturers (3 to 4 added each year) and 30 investigators (3 per
surveillance plan). After 3 years, FDA would expect these numbers to
remain level as the surveillance plans conducted under the earliest
orders reach completion and new orders are issued.
    In the Federal Register of February 5, 2010 (75 FR 6036), FDA
published a 60-day notice requesting public comment on the proposed
collection of information. No comments were received.
    FDA estimates the burden of this collection of information as
follows:

                                                     Table 1.--Estimated Annual Reporting Burden\1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              No. of         Annual Frequency       Total Annual        Hours per
                    21 CFR Section                         Respondents         per Response          Responses           Response         Total Hours
--------------------------------------------------------------------------------------------------------------------------------------------------------
822.9 and 822.10                                                       21                     1                 21                120              2,520
--------------------------------------------------------------------------------------------------------------------------------------------------------
822.21                                                                  5                     1                  5                 40                200
--------------------------------------------------------------------------------------------------------------------------------------------------------
822.28                                                                  5                     1                  5                  8                 40
--------------------------------------------------------------------------------------------------------------------------------------------------------
822.29                                                                  1                     1                  1                 40                 40
--------------------------------------------------------------------------------------------------------------------------------------------------------
822.30                                                                  1                     1                  1                 40                 40
--------------------------------------------------------------------------------------------------------------------------------------------------------
822.38                                                                 40                     1                 40                 40              1,600
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total                                                                                4,440
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ There are no capital costs or operating and maintenance costs associated with this collection of information.

                                                   Table 2.--Estimated Annual Recordkeeping Burden\1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              No. of         Annual Frequency       Total Annual        Hours per
                    21 CFR Section                        Recordkeepers      per Recordkeeping         Record            Records          Total Hours
--------------------------------------------------------------------------------------------------------------------------------------------------------
822.31                                                                 21                     1                 21                 20                420
--------------------------------------------------------------------------------------------------------------------------------------------------------
822.32                                                                 63                     1                 63                  5                315
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total                                                                                735
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ There are no capital costs or operating and maintenance costs associated with this collection of information.

    Dated: April 14, 2010.
Leslie Kux,
Acting Assistant Commissioner for Policy.
[FR Doc. 2010-8977 Filed 4-19-10; 8:45 am]
BILLING CODE 4160-01-S