Self-Regulatory Organization's; The Depository Trust Company; Notice of Filing of a Proposed Rule Change To Amend DTC's Charge Back and Return of Funds Procedures

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38340; File No. SR-DTC-22]

Self-Regulatory Organization's; The Depository Trust Company;

Notice of Filing of a Proposed Rule Change To Amend DTC's Charge Back

and Return of Funds Procedures

February 26, 1997.

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

(``Act''),\1\ notice is hereby given that on December 4, 1996, The

Depository Trust Company (``DTC'') filed with the Securities and

Exchange Commission (``Commission'') the proposed rule change (File No.

SR-DTC-96-22) as described in Items I, II, and III below, which items

have been prepared primarily by DTC. The Commission is publishing this

notice to solicit comments on the proposed rule change from interested

persons.

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

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

of the Proposed Rule Change

The proposed rule change amends DTC's charge back and return of

funds policies (``Policy'') \2\ to shorten from ten business days to

one business day the period within which a paying agent can request

that DTC return principal and income (``P&I'') payments that have been

allocated to participants.

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\2\ A copy of the Policy marked to show the specific changes to

DTC's procedures is attached as Exhibit C to DTC's proposed rule

change which is available for inspection and copying at the

Commission's Public Reference Room or through DTC.

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

Statutory Basis for, the Proposed Rule Change

In its filings with the Commission, DTC included statements

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

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

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

Item IV below. DTC 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 summaries

prepared by DTC.

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

Statutory Basis for, the Proposed Rule Change

The Policy \4\ currently authorizes DTC to return P&I payments to

paying agents after the funds have been credited to the accounts of DTC

participants, which is commonly referred to as a ``clawback,'' if the

paying agent notifies DTC in writing within ten business days of the

payable date that: (i) The issuer has failed to provide the paying

agent with sufficient funds to cover the payments; or (ii) the issuer

has become bankrupt.\5\ The proposed rule change will reduce the period

within which a paying agent can request DTC to return funds to such

paying agent from ten business days to one business day.\6\

Furthermore, the Policy provides that if an agent requests the return

of a P&I payment more than ten business days after a payable date, DTC

will work with the agent and participate to resolve the matter.

However, DTC will not return the allocated payments without the

participant's consent.

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\4\ For a complete description of the procedures relating to the

Policy, refer to Securities Exchange Act Release Nos. 23219 (May 8,

1986), 51 FR 17845 [SR-DTC-03] (notice of filing and immediate

effectiveness on a temporary basis of a proposed rule change); 23686

(October 7, 1986), 51 FR 37104 [SR-DTC-86-4] (order permanently

approving proposed rule change); 26070 (September 9, 1988) 53 FR

36142 [SR-DTC-88-17] (notice of filing and immediate effectiveness

of proposed rule change clarifying that charge back proceedings

apply to DTC's same-day funds settlement system and next-day funds

settlement system); and 35452 (March 7, 1995), 60 FR 13743, [SR-DTC-

95-03] (notice of filing and immediate effectiveness of proposed

rule change excluding money market instrument programs from DTC's

charge back and return of funds procedures).

\5\ The Policy also allows DTC to return previously credited

payments upon written request from a paying agent within ten

business days of the payable date due to an error by the paying

agent. The proposed rule change does not alter this position of the

Policy.

\6\ Under the proposed rule change, although the time within

which a paying agent can request a reversal of allocated funds will

be reduced from ten business days to one business day following

payable date, the actual reversal may take up to two or three

business days after the payable date. For example, if a paying agent

requests a reversal from DTC late in the day of the first business

day after the payable (``P+1''), DTC would likely notify its

participants' on the morning of the following business day

(``P+2''). In the interest of fairness and pursuant to DTC's

procedures, DTC must notify all affected participants one business

day prior to the date on which DTC enters the reversal into its

participant's daily settlement accounts. Accordingly, the actual

reversal will not occur until P+3. Telephone conversation between

Larry E. Thompson, Deputy General Counsel and Senior Vice President,

DTC; Mark Steffensen, Special Counsel, Division of Market Regulation

(``Division''), Commission; and Jeffrey Mooney, Attorney, Division,

Commission (December 18, 1996).

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PSA The Bond Market Trade Association (``PSA'') has expressed

concern with the current policy and the associated risk of loss placed

on DTC participants in the event a payment is returned to a paying

agent.\7\ In response, DTC convened a joint working group of

[[Page 10105]]

paying agents, PSA representatives, and other interested parties.\8\ In

October 1996, the working group concluded that DTC should reduce the

period within which DTC may return funds to paying agent's from ten

business days to one business day.

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\7\ Letter from Heather L. Ruth, President, PSA to William F.

Jaenike, Chairman of the Board and Chief Executive Officer, DTC

(August 16, 1996).

\8\ The working group is composed of representatives from the

Corporate Trust Advisory Board of the American Bankers Association,

the Bank Depository User Group, the Corporate Trust Advisory

Committee of the Corporate Fiduciaries Association of New York City,

the New York Clearing House--Securities Committee, PSA, the

Securities Industry Association, and DTC.

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DTC concurs with the working group's recommendation and proposes to

amend the Policy accordingly. Although the current Policy may encourage

paying agents to make more timely payments to DTC by offering them more

flexibility with regard to the return of funds if an issuer defaults,

DTC believes that it has received only one default-related return of

funds request since the Policy was promulgated in 1986.\9\ Due to the

Policy's infrequent use, DTC proposes to finalize P&I payments sooner

and minimize the uncertainty and risk of loss that the Policy currently

places on DTC's participants.\10\ DTC proposes to implement the

proposed rule change for all P&I payments made after April 30, 1997.

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\9\ In September 1996, a paying agent requested the return of a

single payment $30,000 due to nonpayment by an issuer.

\10\ DTC has notified its participants, paying agents, trustees,

and issuers of the proposed rule change in DTC Important Notice B#

2068-96 (November 26, 1996) and DTC Important Notice B# 2069-96

(November 26, 1996), which are attached as Exhibit B to DTC's

proposed rule change.

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DTC believes the proposed rule change is consistent with the

requirements of Section 17A of the Act \11\ and the rules and

regulations thereunder because the proposal promotes the prompt and

accurate clearance and settlement of transactions in securities. In

addition, DTC believes that the proposed rule change will result in

increased protection to investors by providing finality of payment

within a substantially shorter period of time.

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

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

DTC perceives no impact on competition by reason of the proposed

rule change.

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

Proposed Rule Change Received From Members, Participants or Others

The proposed rule change has been endorsed by the PSA and was

recommended by a special industry working group comprised of PSA

representatives, paying agents, and other interested parties.

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 DTC 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, NW., Washington, DC 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. 552, will be available for inspection and copying in the

Commission's Public Reference Room, 450 Fifth Street, NW., Washington,

DC 20549. Copies of such filing will also be available for inspection

and copying at the principal office of DTC. All submissions should

refer to the file number SR-DTC-96-22 and should be submitted by March

26, 1997.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\12\

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

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97-5370 Filed 3-4-97; 8:45 am]

BILLING CODE 8010-01-M