[Federal Register: August 16, 2006 (Volume 71, Number 158)]
[Notices]
[Page 47262-47264]
[DOCID:fr16au06-139]

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SECURITIES AND EXCHANGE COMMISSION

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

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

August 8, 2006.

I. Introduction

    On April 28, 2006, the American Stock Exchange LLC (``Amex'') filed
with the Securities and Exchange Commission (``Commission'') proposed
rule change SR-Amex-2006-40 pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposal
was published in the Federal Register on June 7, 2006.\2\ Two comment
letters were received.\3\ For the reasons discussed below, the
Commission is granting approval of the proposed rule change.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 53911 (May 31, 2006), 71
FR 33009 (June 7, 2006) [File No. SR-Amex-2006-40].
    \3\ Letters from Noland Cheng, Chairman, SIA Operations
Committee, Securities Industry Association (June 27, 2006) and Paul
Conn, President, Global Capital Markets, Computershare Limited, and
Charlie Rossi, Executive Vice President, Computershare Investor
Services (July 28, 2006).
    \4\ Concurrent with the Commission's approval of NYSE's rule
change, the Commission is also approving in separate orders similar
rule changes proposed by the New York Stock Exchange LLC (``NYSE'')
and The NASDAQ Stock Market LLC (``Nasdaq''). Securities Exchange
Act Release Nos. 54289 (August 8, 2006) [File No. SR-NYSE-2006-29]
and 54288 (August 8, 2006) [File No. SR-NASDAQ-2006-008]. The
Commission has also published notice of a similar rule changed
proposed by NYSE Arca, Inc. Securities Exchange Act Release No.
54126 (July 11, 2006), 71 FR 40768 (July 18, 2006) [File No. SR-
NYSEArca-2006-31].
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II. Description

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

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

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

IV. Discussion

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

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

V. Conclusion

    On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act and
in particular with the requirements of Section 6(b)(5) of the Act and
the rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-Amex-2006-40) be and hereby
is approved.
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    \18\ 17 CFR 200.30-3(a)(12).

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

BILLING CODE 8010-01-P