Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of a Proposed Rule Change to Process Corporate Reorganizations Involving Elections Through NSCC's Continuous Net Settlement System

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-37818; File No. SR-NSCC-96-15]

Self-Regulatory Organizations; National Securities Clearing

Corporation; Notice of Filing of a Proposed Rule Change to Process

Corporate Reorganizations Involving Elections Through NSCC's Continuous

Net Settlement System

October 11, 1996.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(the ``Act''),\1\ notice is hereby given that on August 7, 1996, the

National Securities Clearing Corporation (``NSCC'') filed

[[Page 54696]]

with the Securities and Exchange Commission (``Commission'') the

proposed rule change (File No. SR-NSCC-96-15) as described in Items I,

II, and III below, which items have been prepared primarily by NSCC. On

August 9, 1996, and October 1, 1995, NSCC amended the proposed rule

change.\2\ The Commission is publishing this notice to solicit comments

on the proposed rule change from interested persons.

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\1\ 15 U.S.C. Sec. 78s(b)(1) (1988)

\2\ Letters from Julie Beyers, Associate Counsel, NSCC, to Jerry

Carpenter, Assistant Director, Division of Market Regulation,

Commission (August 8, 1996, and September 27, 1996, as revised

October 1, 1996).

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I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change.

NSCC has filed a proposed rule change that will enable members with

long positions in securities subject to a tender offer with an election

as to consideration to receive protection for receipt of the tender

offer consideration.

II. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change.

In its filing with the Commission, NSCC included statements

concerning the purpose of and basis for the proposed rule change and

discussed any comments that it received on the proposed rule change.

The text of these statements may be examined at the places specified in

Item IV below. NSCC has prepared summaries, set forth in sections (A),

(B), and (C) below, of the most significant aspects of such

statements.\3\

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\3\ The Commission has modified the text of the statements NSCC

submitted.

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(A) Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change.

NSCC currently provides a service for participants with long

positions in some securities subject to a tender offer. Pursuant to

this service, NSCC guarantees to such participants the delivery of

funds or securities pursuant to the terms of the tender offer. NSCC

proposes to extend this protection to tender offers for which there are

elections as to the form of consideration to be received.

Generally, a person who wishes to participate in a tender offer

must notify the tenderer of its decision prior to the expiration of the

tender offer. All shares to be exchanged in the tender offer must be

delivered to the tenderer's agent prior to the end of the protect

period, typically three days after the end of the expiration of the

offer.\4\ However, participants with long positions at NSCC (``long

participants'') are dependent upon the delivery of the securities by

participants with short positions at NSCC (``short participants'')

prior to the end of the protect period. If short participants do not

deliver in time, the long participants will not be able to participate

in the offer. If a long participant has elected to have NSCC guarantee

the delivery pursuant to the terms of the tender offer, certain short

participants will be liable for delivery to the long participant of the

consideration it would have received pursuant to the terms of the

tender offer. The proposed rule change will extend this protection to

tender offers that have an election as to the form of consideration.

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\4\ The purpose of the protect period is to accommodate persons

who purchase securities on the expiration date with the intention of

participating in the tender offer. Such persons generally will not

receive the securities to forward to the tenderer until the

settlement date three business days later.

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Once NSCC receives timely notification of a tender offer and

starting two business days prior to the expiration of an offer, long

participants and short participants with positions in the subject

security will receive information regarding the offer each business day

on the CNS reorganization information report. On the day prior to the

expiration of the protect period in a tender offer with an option as to

the consideration to be received, long participants will be permitted

to elect their preferences (e.g., cash or securities) by submitting

electronic instructions to NSCC through DTC's PTS Terminal system. Such

participants will receive a preliminary protection report. On the same

day, NSCC will issue a report to short participants advising them of

their potential liability in the security if delivery is not made by

the next business day.

If short participants deliver securities prior to the close of

business on the expiration of the protect period, NSCC will redeliver

these securities to long participants. Such participants can then

participate in the tender offer outside the facilities of NSCC. If not

all delivery obligations to the long participants are met, NSCC will

issue to the remaining long participants a final protection report and

will issue to the remaining short participants a final liability

report, both of which reflect open positions remaining as of the close

of business of that day.

At the expiration of the protect period, NSCC will establish two

CNS subaccounts representing the alternative forms of consideration for

each security subject to a tender offer. All open positions for which a

long participant has made an election will be moved into the

appropriate CNS reorganization subaccount. Positions in a CNS

subaccount are frozen until the payable date for the tender offer

(i.e., short participants may not deliver in the securities). The short

participants will immediately be charged a mark based on the difference

between the market value of the subject securities and the

consideration, and NSCC will retain such funds.\5\ In addition, the

long positions and short positions will continue to be marked to the

market daily.

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\5\ In the case of a long participant selecting cash as

consideration, the corresponding short participant will be charged

the difference between the cash offered in the tender offer and the

market price of the securities. In the case of a long participant

selecting securities as consideration, the corresponding short

participant will be charged the difference between the market value

of the subject securities and the market value of the consideration

securities.

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On payable date, the subaccounts will be closed. NSCC will credit

the general CNS account of long participants with either the securities

or cash that they have elected to receive. NSCC will debit the general

account of short participants with either the cash or securities they

have been assigned to deliver (i.e., consideration securities). NSCC

also will credit the account of short participants with the marks to

the offer price being retained by NSCC. Some offers have limits on how

many of the subject securities the offeror will accept or what

percentage of consideration will be paid in cash or securities. At the

end of the protect period, the offeror will reject on a pro rata basis

excess securities. NSCC will similarly only hold short participants

liable for the consideration for subject securities to the extent such

securities would have been accepted by the tenderer.

NSCC believes that the proposed rule change is consistent with the

requirements of Section 17A of the Act and the rules and regulations

thereunder because it should facilitate the prompt and accurate

clearance and settlement of securities transactions by expanding the

types of reorganization that can be processed through CNS.\6\

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\6\ 15 U.S.C. Sec. 78q-1 (1988).

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(B) Self-Regulatory Organization's Statement on Burden on Competition

NSCC perceives no impact on competition by reason of the proposed

rule change.

[[Page 54697]]

(C) Self-Regulatory Organization's Statement on Comments on the

Proposed Rule Change Received From Members, Participants, or Others

NSCC has not solicited nor received comment on the proposed rule

change.

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

Commission Action

Within thirty-five days of the date of publication of this notice

in the Federal Register or within such longer period (i) as the

Commission may designate up to ninety days of such date if it finds

such longer period to be appropriate and publishes its reasons for so

finding or (ii) as to which NSCC consents, the Commission will:

(a) By order approve such proposed rule change or

(b) Institute proceedings to determine whether the proposed rule

change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views and

arguments concerning the foregoing. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street N.W., Washington, D.C. 20549.

Copies of the submission, all subsequent amendments, all written

statements with respect to the proposed rule change that are filed with

the Commission, and all written communications relating to the proposed

rule change between the Commission and any person, other than those

that may be withheld from the public in accordance with the provisions

of 5 U.S.C. Sec. 552, will be available for inspection and copying in

the Commission's Public Reference Room, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of such filing will also be available

for inspection and copying at the principal office of NSCC. All

submissions should refer to the file number (File No. SR-NSCC-96-15)

and should be submitted by November 12, 1996.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\7\

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\7\ 17 CFR 200.30-3(a)(12) (1996).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96-26929 Filed 10-18-96; 8:45 am]

BILLING CODE 8010-01-M