regulatory organizations; proposed rule changes: Depository Trust Co.,

[Federal Register: August 31, 1998 (Volume 63, Number 168)]

[Notices]

[Page 46262-46263]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr31au98-93]

[[Page 46262]]

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40361; File No. SR-DTC-98-15]

Self-Regulatory Organizations; The Depository Trust Company; Order Granting Accelerated Approval of a Proposed Rule Change To Incorporate the Rules and Procedures of Participants Trust Company To Increase the Size of the Board of Directors and To Amend the Rules Regarding the Use of the Participants Fund

August 25, 1998.

On July 13, 1998, The Depository Trust Company (``DTC'') filedwith the Securities and Exchange Commission (``Commission'') and on July 30, 1998, amended a proposed rule change (File No. SR-DTC-98-15) 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 August 10, 1998.\2\ On August 11, 1998, DTC filedits second amendment to the proposed rule change.\3\ No comment letters were received. For the reasons discussed below, the Commission is granting accelerated approval of the proposed rule change.

\1\ 15 U.S.C. 78s(b)(1).

\2\ Securities Exchange Act Release No. 40300 (August 3, 1998), 63 FR 42650.

\3\ The August 11, 1998, amendment represents a technical amendment to the proposed rule change and as such does not require republication of notice.

1. Description

   The rule change relates to the merger of DTC and Participants Trust Company (``PTC'').\4\ DTC and PTC have entered into a merger agreement under which PTC will merge with and into DTC. DTC will form a mortgage- backed securities division (``MSB Division'') to deliver the depository services currently provided by PTC to its participants with respect to PTC-eligible securities. DTC will adopt PTC's rules and procedures, with certain modifications, as the rules and procedures of the MBS Division. Under the merger agreement, the MBS Division will remain in place until at least September 30, 2000. Current PTC participants will be given the opportunity to become participants and limited purpose participants in the MBS Division. The cash and securities presently constituting the PTC participants fund will be transferred to a new MBS Division participants fund.

   \4\ For a more detailed description of the merger, refer to Securities Exchange Act Release No. 40121 (June 24, 1998), 63 FR 35631 [File Nos. SR-DTC-98-12, SR-PTC-98-02] (notice of proposed rule change relating to proposed merger between DTC and PTC).

   The merger agreement also provides that as of the effective date of the merger one PTC board member nominated by PTC's board shall become a member of DTC's Board. This new director position is to remain in place at least until September 30, 2000. In order to accommodate the new director position, DTC is amending its By-Laws to increase the number of directors on its Board from seventeen to eighteen.

   Virtually all of PTC's participants are also DTC participants.\5\ DTC participants are entitled to acquire DTC stock based upon their use of DTC's services. The amount of each DTC participant's entitlement is recalculated each year, and participants that purchase DTC's stock are permitted to vote in the election of DTC's Board of Directors. After DTC and PTC merge, the calculation of each participant's entitlement to acquire DTC stock will take full account of the participant's use of services provided through the MBS Division.

   \5\ The only exceptions are Federal Home Loan Mortgage Corporation (a limited purpose participant), Federal National Mortgage Association, and The Federal Reserve Bank of Cleveland.

   In addition to the amendments regarding the creation of the MBS Division, DTC is adding language to its Rule 4 to make clear that if DTC were to cease providing some or all of its services, it could use the participants fund to cover wind-down costs that are not covered by service fee revenues or other available resources.

2. Discussion

   The Commission believes that DTC's proposal to make PTC's rules a part of DTC's rules is consistent with DTC's obligations under Section 17A of the Act.\6\ The Commission has previously approved all of PTC's rules as being consistent with PTC's responsibility as a clearing agency as set forth in Section 17A(b)(3) of the Act.\7\ The Commission believes that by adopting these previously approved rules of PTC as the rules for its newly created MBS Division, DTC will be able to fulfill its statutory obligations under Section 17A(b)(3) with respect to the clearance, settlement, and depository service provided by its MBS Division.

   \6\ 15 U.S.C. 78q-1.

   \7\ 15 U.S.C. 78q-1(b)(3).

   Section 17A(b)(3)(C) of the Act\8\ requires that the rules of a clearing agency assure the fair representation of its shareholders (or members) and participants in the selection of its directors and administration of its affairs. The Commission believes that the proposed rule change is consistent with DTC's obligations under Section 17A(b)(3)(C) for several reasons. First, almost all of PTC's members are also members of DTC and therefore are already represented on DTC's Board.\9\ Second, the rule change provides that when the merger become effective a PTC board member nominated by PTC's Board will become a member of DTC's Board. Third, the rule change provides that the calculation of DTC participants' entitlement to purchase stock, and therefore vote in the election of DTC's Board, will include the participants' use of the services of the MBS Division.

   \8\ 15 U.S.C. 78q-1(b) (3) (C).

   \9\Supra note 5.

   Section 17A(b)(3)(F) of the Act\10\ requires that the rules of a clearing agency be designed to assure the safeguarding of securities and funds which are in the custody or control of the clearing agency or for which it is responsible. The Commission believes that by adding language to Rule 4 to make clear and explicit DTC's rights and obligations with respect to its participants' fund, DTC's ability to assure the safeguarding of securites and funds which are in DTC's custody or control or for which it is responsible should be enhanced.

   \10\ 15 U.S.C. 78q-1(b)(3)(F).

   DTC has requested that the Commission approve the proposed rule change prior to the thirtieth day after publication of the notice of the filing. The Commission finds good cause for approving the proposed rule change prior to the thirtieth day after the publication of notice because such approval will allow securities transactions that are currently processed through PTC to be processed efficiently through the MBS Division of DTC and will allow an orderly transfer of PTC's operations to DTC.

3. Conclusion

   On the basis of the foregoing, the Commission finds that the proposal is consistent with the requirements of the Act and in particular with the requirements of Section 17A of the Act\11\ and the rules and regulations thereunder.

   \11\ 15 U.S.C. 78q-1.

   It is therefore ordered, pursuant to Section 19(b)(2) of the Act, that the proposed rule change (File No. SR-DTC-98-15) be and hereby is approved on an accelerated basis.

   For the Commission by the Division of Market Regulation, pursuant to delegated authority.\12\

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

   [[Page 46263]]

   Jonathan G. Katz, Secretary.

   [FR Doc. 98-23316Filed8-28-98; 8:45 am]

   BILLING CODE 8010-01-M