DTC Imposes Corporate Action DTC Eligibility Fee

On December 30, 2015, the Securities and Exchange Commission (“SEC”) published a notice that it was soliciting comments for a proposed rule change submitted by The Depository Trust Company (“DTC”) filed a pursuant to section 19(b)(3)(A) of the Act and Rule 19b-4(f)(2) thereunder. DTC’s proposed rule was effective upon submission to the SEC.

DTC’s proposed rule change consists of a change to DTC’s Fee Schedule (“Fee Schedule”) to add a new DTC eligibility fee that would be charged to the transfer agent of any DTC-eligible issue when the transfer agent notifies DTC of a corporate action event (“Corporate Action”) that requires a new CUSIP to be made DTC-eligible. The types of actions that require a new CUSIP must be submitted to The Financial Industry Regulatory Authority (“FINRA”) pursuant to Rule 6490. Under these circumstances, DTC conducts a review of the issuer’s shares in street name. Issuers must demonstrate the “free trading” nature of their shares in street name by providing DTC with a legal opinion. Corporate Actions requiring a new CUSIP include forward and reverse stock splits, name changes, and certain recapitalizations. These types of transactions require FINRA and DTC to spend significant time and effort in their review.

In its filing with the SEC, 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. DTC has provided summaries of the most significant aspects of such statements.

Purpose of DTC’s Proposals

DTC’s new rule change imposes a fee that would be charged to the transfer agent of a DTC-eligible security when DTC is notified by the transfer agent to process a Corporate Action with respect to the security that requires DTC to make a new CUSIP eligible for DTC services.

Securities may become eligible for deposit at DTC through initial offerings, the Older Issue Eligibility Request process, and Corporate Actions processing.  Through ongoing efforts to evaluate its fees and align them with operating costs, DTC has determined that it is not recovering costs that it incurs in connection with making securities eligible for DTC services through its Corporate Actions process.

Pursuant to the proposed rule change, in order to align DTC’s fees with the costs it incurs in making securities eligible for DTC services through its processing of Corporate Actions, DTC would implement a new fee, to be known as the Corporate Actions Eligibility Fee, which would be charged to the transfer agent of any DTC-eligible security when the transfer agent notifies DTC of a Corporate Action that requires DTC to make a new CUSIP eligible for DTC services. The amount of the Corporate Action Eligibility Fee would be $1,000 per new CUSIP for any security that is made eligible at DTC in connection with a Corporate Action.  The change to the Corporate Action Eligibility Fee takes into account the allocation of resources required and more manually intensive processing performed by Reorganization and Underwriting in order for DTC to provide the services necessary to make new CUSIPs DTC-eligible when they are issued as a result of Corporate Actions.

Statutory Basis for DTC’s Proposals

Section 17A(b)(3)(F) of the Act requires that the rules of the clearing agency be designed to promote the prompt and accurate clearance and settlement of securities transactions. DTC believes that the proposed rule change is consistent with this provision because the Corporate Action Eligibility Fee would offset costs incurred by DTC in its allocation of resources necessary for making CUSIPs eligible in connection with Corporate Actions. The Corporate Action Eligibility Fee is designed to facilitate allocation of resources necessary for the continued offering of this service, thus the proposed rule change would promote the prompt and accurate clearance and settlement of securities transactions.

DTC’s Statement on Burden on Competition

DTC does not believe that the proposed rule change would have any impact or impose any burden on competition because the proposed rule change equally applies (on a per CUSIP basis) to all issues made eligible for DTC services as the result of a Corporate Action.

Date of Effectiveness of DTC’s Proposed Rule Change

DTC’s rule change become effective pursuant to section 19(b)(3)(A) of the Act and paragraph (f) of Rule 19b-4 thereunder.  At any time within 60 days of the filing of the proposed rule change, the SEC summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.

Solicitation of Comments

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by using the SEC’s Internet comment form ); or sending an email to [email protected]. Please include File Number SR-DTC-2015-012 on the subject line.

For further information about this securities law blog  post and DTC eligibility, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit  www.securitieslawyer101.com.   This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship.  Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855