-------------------- BEGINNING OF PAGE #1 -------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35038; File No. S7-34-94
Transfer Agents Operating Direct Registration System
AGENCY: Securities and Exchange Commission
ACTION: Concept Release
SUMMARY: The Securities and Exchange Commission is soliciting
comment on the policy implications of, and the regulatory issues
raised by, a transfer agent operated book-entry registration
system (hereinafter referred to as the "direct registration
system" or "DRS"). Investors who choose to participate in a
direct registration system could have their securities registered
in book-entry form directly on the books of the issuer and could
receive a statement of ownership in lieu of a securities
certificate. The direct registration system would extend book-
entry registration to corporate equity and debt securityholders;
book-entry registration is currently offered to dividend
reinvestment plans and shares of registered investment companies.
This system is being considered by issuers and transfer agents in
preparation for faster trade settlements which will be required
on June 7, 1995.
DATES: Comments should be submitted on or before [insert date 60
days after publication date].
ADDRESSES: Interested persons should submit three copies of their
written data, views, and opinions to Jonathan G. Katz, Secretary,
Securities and Exchange Commission, 450 Fifth Street, N.W., Mail
Stop 6-9, Washington D.C. 20549. Comment letters should refer to
File No. S7-34-94. All comment letters will be available for
public inspection and copying at the Commission's Public
Reference Room, 450 Fifth St., N.W., Washington D.C. 20549.
FOR FURTHER INFORMATION CONTACT Ester Saverson, Jr., Senior
Counsel, or Michele J. Bianco, Attorney, at 202/942-4187, Office
of Market Supervision, Mail Stop 5-1, Division of Market
Regulation, Securities and Exchange Commission, Washington, D.C.
20549.
SUPPLEMENTARY INFORMATION:
In October 1993, the Commission adopted Rule 15c6-1 under
the Securities Exchange Act of 1934 ("Exchange Act") which,
effective June 7, 1995, will shorten the standard timeframe for
settling securities transactions from five to three business
days. The shorter settlement period will, among other things,
reduce the potential for systemic risk, promote efficient and
liquid markets, and foster investor confidence in the U.S.
securities markets. The Commission took this step recognizing
that the implementation of faster settlement of securities
transactions would require considerable effort, including other
changes in the clearance and settlement process. Moreover, the
Commission recognized that these changes would have wider
implications for investors, securities markets, and financial
intermediaries.-[1]- Even before the Commission proposed to
require faster settlement of securities transactions, commenters
overwhelmingly expressed concern that changes in the settlement
cycle should not also result in mandatory elimination of the
stock certificate.-[2]- In response to these concerns, the
-[1]- See Securities Exchange Act Release No. 33023 (October
6, 1993), 58 FR 52891 (October 13, 1993) (hereinafter
cited as "T+3 Adopting Release").
-[2]- See Securities Exchange Act Release No. 31904 (March 1,
1993), 58 FR 11806, 11808. The stock certificate
evidences that the owner is registered on the books of
the issuer as a shareholder. Because the certificate is
(continued...)
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Commission noted in the release proposing Rule 15c6-1 that "the
proposed rule should not affect the ability of individual
investors to obtain a physical certificate. Individual investors
who desire to maintain record ownership in certificate form still
will be able to do so."-[3]-
Sparked by investor trends away from requesting physical
certificates,-[4]- several corporations and transfer agents-[5]-
-[2]-(...continued)
a negotiable instrument under state commercial laws, it
allows the registered owner to deliver the bundle of
rights it represents to a third party without first
having to change the registration on the books of the
issuer. Guttman, Modern Securities Transfer, 1.01 at
1-2, (Warren, Gorham & Lamont 1987).
State commercial laws specify rules concerning the transfer
of the rights that constitute securities and the
establishment of those rights against the issuer and other
parties. Official comment to 8-101, The American Law
Institute and National Conference of Commissioners of
Uniform State Laws, Uniform Commercial Code, 1990 Official
Text with Comments, Article Eight at 708 (West 1991).
The American Law Institute and National Conference of
Commissioners on Uniform State Laws recently approved a
revision to Uniform Commercial Code ("UCC") Article Eight.
See Mooney, Jr., Rocks, Schwartz, An Introduction to the
Revised U.C.C. Article 8 and Review of Other Recent
Developments with Investment Securities, 49 The Business
Lawyer 1891 (August 1994).
-[3]- Securities Exchange Act Release No. 31904 (February 23,
1993), 58 FR 11806.
-[4]- Individual investors can choose to be registered
directly on the issuer's register or they can engage a
broker-dealer or bank to act as the custodian of their
investment portfolios. The use of a broker-dealer or
bank as a custodian typically is referred to as "street
name" registration. See Final Report of the Securities
and Exchange Commission on The Practices of Recording
the Ownership of Securities in the Records of the
Issuer in Other Than the Name of the Beneficial Owner
of Such Securities (December 3, 1976); Report on
Improving Communication Between Issuers and Beneficial
Owners of Nominee Held Securities (June 1982).
Securities held in street name typically are on deposit with
a securities depository where the broker-dealer or bank (or
its agent) participate. Securities depositories for
corporate equity securities include The Depository Trust
Company, The Depository Trust Company of Philadelphia, and
The Midwest Securities Trust Company. These depositories
are limited purpose trust companies, members of the Federal
Reserve System, and registered clearing agencies under the
Exchange Act. In addition to holding securities for their
members (accepting deposits and processing withdrawals),
depositories provide book-entry delivery and dividend and
interest collection and payment services. In 1992, the
ratio of book-entry deliveries to certificate withdrawals
was 12.9:1, almost six times greater than the 1982 ratio
(2.3:1). See U.S. Securities and Exchange Commission, 1993
Annual Report (1994) at 125.
-------------------- BEGINNING OF PAGE #3 -------------------
that maintain their shareholder records want to expand their use
of automated systems for recording ownership of securities and
related transfer processing. As described below, they would
offer shareholders who opt for direct registration the
opportunity to receive an account statement instead of a
negotiable certificate,-[6]- the opportunity to obtain a
certificate upon demand, and the opportunity to direct the
transfer of the underlying position to a broker-dealer upon
request. For this system to be successful, broker-dealers,
transfer agents and clearing agencies must cooperate to establish
the systems and communication facilities to facilitate these
services.
The Commission is encouraged by these developments and
believes that in general, the direct registration concept is
consistent with Congressional objectives in Section 17A(a)(1) of
the Exchange Act.-[7]- The Commission is soliciting comment on
what steps are necessary to further such initiatives, including
whether it would be appropriate to establish turnaround, audit,
or other standards to foster investor confidence in the safety
and efficiency of resulting systems.
I. The Direct Registration Concept
A. Historical Background
Over the past ten years, regulators, representatives of
private industry, and the transfer agent community have worked
together to explore alternatives to maintaining ownership
interest in securities without reliance on negotiable securities
certificates. For example, on February 25 and 26 and March 8,
1985, the Division of Market Regulation ("Division") held
"Securities Immobilization Workshops" to discuss the use of
-[5]-(...continued)
-[5]- Transfer agents are an integral component of the
clearance and settlement process. There are
approximately 1,576 registered transfer agents that
maintain, on behalf of the issuers of securities, the
official register of stockholders or bondholders.
Transfer agents issue negotiable certificates
evidencing security ownership, communicate on behalf of
issuers with securityholders, and record changes in
security ownership as a result of securities
transactions.
-[6]- The use of account statements instead of negotiable
instruments is commonplace for investment products,
such as securities issued by open-ended investment
companies, and is mandatory for investors who own U.S.
Treasury bills, bonds, and notes. Many open-end
investment companies deal directly with investors.
They or their transfer agents maintain automated
ownership records and issue periodic statements to the
owners indicated on those records. Most of these
companies also have broker-dealers and other financial
intermediaries as registered owners who act as nominees
for their customers. Under this arrangement, the
ultimate investor receives a statement reflecting his
or her portfolio from the nominee. The U.S. Department
of the Treasury no longer issues negotiable
certificates evidencing ownership of negotiable bonds,
bills, and notes. Instead, individual investors
seeking direct registration can open accounts under the
"Treasury Direct" program. See Department of the
Treasury Direct Program, 31 CFR 357.
-[7]- See 15 USC 78q-1(a)(1).
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central depositories to immobilize securities certificates and
the development of book-entry systems to register securities
ownership. Workshop participants were of the view that an
alternative to street name registration was needed to allow
direct registration evidenced by a negotiable securities
certificate.-[8]- Among other things, workshop participants
recognized the desirability of issuing uncertificated securities
through issuer or transfer agent operated book-entry systems.
On November 27, 1990, the Commission held a Roundtable on
Clearance and Settlement to discuss the implementation of, and
the status reports of, the recommendations of the Group of Thirty
U.S. Working Committee regarding clearance and settlement.-[9]-
Participants at the Roundtable discussed, among other things,
ways in which investors could obtain the benefits of direct
registration without the issuance of securities certificates and
without street name registration. Participants noted that the
pressure to have securities available for settlement in a three-
days after trade date ("T+3") environment will increase the need
for immobilizing securities certificates and the use of book-
entry transfer at the retail level. Thus, participants
recognized the value of developing a transfer agent operated
book-entry registration system as an alternative to street name
registration.
In August 1991, the U.S. Working Committee, Group of Thirty
Clearance and Settlement Project, issued a report which, among
other things, identified the DRS as an alternative to owning
certificated securities.-[10]- The report was promulgated by a
Subcommittee of the U.S. Working Committee of the Group of
Thirty, the T+3 Direct Registration Subcommittee, co-chaired by
-[8]- Progress and Prospects: Depository Immobilization of
Securities and Use of Book-Entry Systems, Draft Staff
Report, Division of Market Regulation, U.S. Securities
and Exchange Commission (June 14, 1985) (hereinafter
cited as "Immobilization Report").
-[9]- In March 1989, the Group of Thirty released a report
which offered nine recommendations for reducing risk
and improving efficiency in the clearance and
settlement systems in the world's corporate securities
markets. Clearance and Settlement Systems in the
World's Securities Markets, Group of Thirty New York
and London (1989). Those recommendations are described
in an appendix to the T+3 Adopting Release. Supra note
1, at Appendix 2 at n.6, 58 FR 52905 n.6.
Subsequently, U.S. Steering and Working Committees were
formed to study the existing systems in the United
States and to recommend appropriate changes based upon
the Group of Thirty's nine recommendations. In
November 1990, the U.S. Working Committee, Group of
Thirty, Clearance and Settlement Project issued a
report, entitled Implementing The Group of Thirty
Recommendations in the United States. In that report,
the U.S. Working Group concluded that the U.S.
corporate clearance and settlement systems were not in
compliance with two of the recommendations, moving to a
three business day settlement period and adopting a
same-day funds payment system, and that the these two
recommendations should be implemented in the U.S.
-[10]- Providing Alternatives to Certificates For the Retail
Investor, U.S. Working Committee, Group of Thirty,
Clearance and Settlement Project (August 1991).
-------------------- BEGINNING OF PAGE #5 -------------------
representatives of the Securities Transfer Association ("STA")
and the American Society of Corporate Secretaries ("ASCS"). This
subcommittee viewed the DRS as offering investors an additional
choice of security ownership in the form of an account statement,
in which the securities would be registered in the name of the
investor and maintained on the books of the issuer in a book-
entry format.-[11]-
Although the U.S. Working Committee of the Group of thirty
views DRS as an alternative form of securities ownership, it
decided that elimination of certificates was not necessary at
that time to achieve a shorter settlement cycle, and thus did not
endorse the DRS or any specific book-entry system. The U.S.
Working Committee, however, encouraged the securities transfer
agent community to continue its work on developing a book-entry
registration system.
In 1992, the STA, the Corporate Transfer Agents Association
("CTAA"), and the Securities Industry Committee of ASCS formed
the Investor Registration Option Implementation Committee
("IRO/IC") to develop an issuer/transfer agent operated book-
entry registration system. The IRO/IC developed the concept of a
book-entry direct registration system operated by transfer agents
("DRS Concept"), modeling it after the systems used in dividend
reinvestment and stock purchase programs ("DRSPPs")-[12]- which
are currently offered by many issuers or their transfer agents.
This concept would allow any retail investor who wants his or her
securities to be registered directly on the books of the issuer,
but does not necessarily want to receive a certificate, to
register those securities in book-entry form directly on the
books of the issuer.
-[11]- As described in the subcommittee report, the DRS would
allow individual investors to hold securities in
electronic form, without putting those securities in
street name at a financial intermediary, by providing
those investors who choose to be registered on the
books of the issuer with an optional custody
arrangement with the transfer agent. Under DRS, if a
security is registered on the books of the issuer, the
investor would receive a statement reflecting his or
her ownership interest. An investor would retain the
option of selling securities through the broker of his
or her choice by notifying the transfer agent to move
the securities from the books of the issuer to the
books of a broker-dealer. Certificates also would be
available on request.
-[12]- DRSPPs are programs offered by corporations or closed-
end investment companies that allow participants to
purchase additional shares of common stock by
reinvesting their cash dividends and, in many cases, by
making optional cash payments. Certain DRSPPs permit
dividends on preferred stock and interest earned on
debt securities to be reinvested in shares of common
stock. The earliest DRSPPs were dividend reinvestment
plans ("DRIPS") in which participation was limited to
issuers' shareholders and employees and through which
additional shares could be purchased only with
reinvested dividends. Since the first DRIPs were
introduced in the late 1960s, the greatest changes have
been in the method by which participants can accumulate
shares (i.e., optional cash payments), and the types of
persons that are permitted to participate (e.g., non-
shareholders of the corporation).
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B. The DRS Concept and Cross-Industry Consensus
After a series of discussions, the IRO/IC and the Securities
Industry Association ("SIA") agreed in 1994 to the basic
structure of the DRS Concept.-[13]- Agreement among transfer
agents, corporations, broker-dealers, and banks regarding the
basic structure and operational flows is critical because its
implementation and operation must be efficient, safe, and largely
transparent to investors. At the same time, issuers and transfer
agents would be free to decide for themselves whether they wanted
to offer investors the services that comprise DRS.
The agreement between the IRO/IC and the SIA calls for the
formation of a joint advisory committee to work with the
registered securities depositories to develop an electronic
communication system between transfer agents and
depositories.-[14]- This proposed system will allow a broker-
-[13]- Letter from Raymond J. Riley, Co-Chair, IRO/IC and
James J. Volpe, Director, IRO/IC (February 16, 1994),
to Jonathan Kallman, Associate Director, Division of
Market Regulation, Commission; Letter from George
McNamee, Chairman of Clearance and Settlement
Committee, and John Sanders, Chairman of Operations
Committee, SIA to Al DeMaio, et al (October 18, 1994).
-[14]- The IRO/IC and the SIA agreed to the following six
points:
1. Customers will be able directly or through their
broker-dealers to request a certificate
electronically or otherwise at the time of initial
purchase.
2. Electronic acknowledgment that the securities have
been registered in book-entry form will be
provided to the broker-dealer with a written
record of ownership forwarded to the customer.
Electronic communications between the
issuer/transfer agent and the depositories must be
standardized.
3. Investor direct movement of securities will be
provided in electronic form from the books of the
issuer to the books of the investor's broker-
dealer (which may not be the same broker-dealer
that initially purchased the shares on behalf of
the customer).
4. Transfer agents will not use the shareholder list
of one issuer to solicit those shareholders to buy
shares of other issuers for which they act as
transfer agent.
5. The IRO/IC and the SIA will form a joint advisory
group to work with the depositories to identify
and design a process that will allow the investor
to instruct the transfer agent, through the
broker-dealer, to register shares on the books of
the issuer in book-entry form or to request a
certificate. If an investor fails to choose an
option, the transfer agent will register the
(continued...)
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dealer to deliver electronically to a transfer agent a customer's
request that the securities be registered on the books of the
issuer in book-entry form. The proposed electronic system also
will allow the transfer agent to send an electronic
acknowledgment to the broker-dealer that the securities have been
registered in the customer's name on the books of the issuer in
book-entry form.
Under the DRS Concept, assuming the issuer and transfer
agent elect to offer DRS services, an investor may instruct the
broker-dealer at the time of purchase to register the securities
directly on the books of the issuer, to leave the securities with
his broker in street name, or to request a certificate.-[15]- If
an investor does not choose an option, the securities will be
registered on the books of the issuer in book-entry form as the
default form of registration. Assuming DRS services are offered,
an investor also may establish a DRS account, or credit
additional securities to his or her DRS account, by submitting
physical certificates to the transfer agent. In addition,
issuers and transfer agents could offer an option to non-
shareholders to make initial cash payments to the transfer agent
thereby allowing an investor with no prior relationship to the
issuer to purchase shares and participate in the DRS.-[16]-
Under the DRS Concept the broker-dealer would communicate
its customers' registration option to the transfer agent through
an electronic communication link (e.g., computer to computer
-[14]-(...continued)
securities on the books of the issuer in book-
entry form.
6. The IRO/IC and the SIA will develop educational
materials and the programs to inform the brokerage
community and customers about the various forms of
registration options, e.g., direct registration
evidenced by negotiable certificates, direct
registration evidenced by account statements, and
indirect registration through a broker-dealer.
The Commission invites comment as to whether the terms of
the agreement are consistent with the Exchange Act and
whether any of these terms impose a burden on competition.
If commenters believe one or more of these terms imposes a
burden on competition, please describe whether that burden
is nonetheless necessary or appropriate to achieve the goals
of the Exchange Act.
-[15]- If the issuer and transfer agent determine not to
provide DRS services, investors could still choose
between street name and direct registration. Investors
who choose direct registration would receive negotiable
certificates as a matter of course.
-[16]- Where an issuer or affiliate is offering securities,
compliance with the registration provisions of the
Securities Act of 1933 ("Securities Act") is required
absent an exemption (e.g., Section 5 of the Securities
Act [15 U.S.C. 77e (1993)]), as is compliance with such
other requirements as Section 15(a) of the Exchange Act
[15 U.S.C. 78o(a) (1993)] and Rule 10b-6 under Section
10(b) of the Exchange Act [17 CFR 240.10b-6]. See also
Letter re: The Securities Transfer Association, Inc.
(December 1994) Letter re: First Chicago Trust Company
of New York (December 1994).
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transmissions) established with the depositories. Once the
transfer agent registers the securities on the books of the
issuer, the transfer agent would send an electronic
acknowledgement of the registration to the broker-dealer through
the depository and would send an account statement directly to
the investor reflecting the number of securities purchased. All
subsequent securityholder communications, including proxy
solicitations, would be sent directly to the investor from the
transfer agent. The transfer agent would vote the securities in
accordance with the instructions received from the DRS
participant. DRS participants would have the option of either
receiving their cash dividends, or, if the issuer offers a DRSPP,
reinvesting their cash dividends in the purchase of new
securities. Any dividends in the form of securities, or any
securities resulting from a stock split owed to a DRS
participant, would be credited to the DRS participant's account.
As with other DRSPPs today, no certificates would be issued
unless the DRS participant makes a specific request for
certificates by phone, facsimile, or mail.
II. Discussion
In light of the faster settlement processing standards that
will be imposed on retail customers in the T+3 environment, the
Commission believes that investors should have the choice to
register their securities in book-entry form directly on the
books of the issuer evidenced by an account statement.-[17]- The
Commission believes that such an alternative is consistent with
Congressional objectives in Section 17A(a)(1)(C) of the Exchange
Act;-[18]- new data processing and communication techniques
create the opportunity for more efficient, effective, and safe
procedures for clearance and settlement. Although the SIA and
the transfer agent community have agreed on the general design of
the electronic communication system, the Commission understands
that they have technical issues to resolve before the securities
depositories can provide the specifications to build the
electronic communication system that would allow the movement of
-[17]- Subject to an issuer's determination of whether to make
certificates available to shareholders, the Commission
believes investors should be able to obtain negotiable
certificates on request. [State corporate laws
generally entitle shareholders to obtain certificates
evidencing their investment. See e.g. 8 Del. Code Ann.
General Corporation Law 158 (1991); N.Y. Bus. Corp.
Law 508 (McKinney 1986)]. The Commission continues
to believe that faster trade settlements should not
require investors to forego the benefits of direct
registration or the opportunity to receive a negotiable
certificate evidencing their investment. The
Commission notes that Rule 15c6-1 does not require
customers to leave funds, securities, or both subject
to the broker-dealers' possession or control. Although
in announcing the adoption of Rule 15c6-1, the
Commission noted that broker-dealers "could encourage
clients to deposit funds or securities . . . upon
placing an order, or to send funds and securities that
day," and although financial management accounts have
gained in popularity for various reasons, the
Commission advises broker-dealers to be careful not to
represent to their customers that the rule requires
customers to leave securities or funds with broker-
dealers after trade settlement.
-[18]- See 15 USC 78q-1(a)(1)(C).
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securities between transfer agents and broker-dealers.-[19]- The
Commission urges the SIA, the transfer agent community, and the
issuer community, in cooperation with the depositories, to design
the electronic communication system, to build and test that
system, and to implement the DRS prior to the June 7, 1995
implementation date for T+3 settlement.-[20]-
The Commission believes that the proposed agreement on the
DRS concept and the electronic link between transfer agents and
depositories necessary for timely and effective communication
with broker-dealers should enhance the efficiency of the
clearance and settlement system. Because the Commission is
concerned about the parties' ability to implement the system
promptly and to follow through on their commitments, the
Commission invites commenters to address whether the Commission
or the self-regulatory organizations should take a more active
role in facilitating education regarding the registration and
safekeeping alternatives available to investors. Comments are
also requested as to whether the Commission should require
broker-dealers to disclose to customers at the time an account is
opened that direct registration is available as an alternative to
street name registration; what that disclosure might include; and
whether additional periodic disclosures should be required after
the account is opened.
In addition, the Commission requests comment as to whether
transfer agents that provide the DRS or other uncertificated
recordkeeping functions should be subject to increased regulatory
oversight to minimize any disruption of the marketplace and to
provide greater efficiency to the clearance and settlement
system. For example, is there a need for a Commission rule to
prevent transfer agents from using shareholder lists without
issuer consent for any purpose other than the transfer of that
company's securities? To foster the efficient operation of the
DRS and to minimize any adverse effects on the secondary market
and the national clearance and settlement system, should transfer
agents that participate in the DRS be required to join at least
one of the registered securities depositories for the purposes of
performing the DRS functions?
The Commission believes that safe and efficient transfer
agent performance is critical to efforts by the securities
industry to provide alternative registration options. Transfer
agent operated book-entry systems, including the DRS, pose
different and potentially increased risks to investors. For
example, increased reliance on the records of transfer agents may
place additional burdens on transfer agents and could increase
the risks to investors arising from substandard transfer agent
performance. Accordingly, commenters are urged to review the
companion release issued today, which invites comment on the need
-[19]- The SIA stated that while there are unresolved
technical questions, none appear insurmountable.
Letter from John J Sanders, Jr., Chairman, Operations
Committee, SIA, and George C. McNamee, Chairman,
Clearance and Settlement Committee, SIA, to Al DeMaio,
The Midwest Securities Trust Company; Ron Burns, The
Depository Trust Company; and Keith Kessel,
Philadelphia Depository Trust Company (October 18,
1994).
-[20]- The Commission notes that Division staff today have
issued correspondence regarding a proposed expansion of
shareholder services that incorporates some of the DRS
features. See Letter re: First Chicago Trust Company
of New York (December 1994).
-------------------- BEGINNING OF PAGE #10 -------------------
for new and revised rules governing transfer agent activities in
light of the proposed DRS Concept, DRSPPs, and custodial
arrangements with registered securities depositories to hold
securities registered in the name of those depositories in book-
entry form ("uncertificated recordkeeping functions").-[21]- For
-[21]- See Securities Exchange Act Release No. 35040 (December
1, 1994) (hereinafter referred to as "companion
release"). This discussion is limited to transfer
agent regulation and does not address the application
of the broker-dealer registration provisions of the
Exchange Act to the DRS or DRSPPs. Some of the
activities in connection with the DRS or DRSPPs may
raise broker-dealer registration issues under Section
15(a) of the Exchange Act.
Section 15(a) of the Exchange Act generally provides that a
"broker" or "dealer" that uses the mails or any means of
interstate commerce to effect transactions in, or to induce
or attempt to induce the purchase or sale of, any security
must register with the Commission, unless an exemption
applies. Section 3(a)(4) of the Exchange Act defines a
"broker" as any person (other than a bank) engaged in the
business of effecting transactions in securities for the
account of others. A "dealer" is defined in Section 3(a)(5)
of the Exchange Act as any person (other than a bank)
engaged in the business of buying and selling securities for
its own account, whether through a broker or otherwise.
Broker-dealer registration serves to minimize the risks
typically associated with the execution of securities orders
and the handling and custody of funds and securities. The
Commission's financial responsibility rules applicable to
registered broker-dealers, for example, are designed to
provide safeguards with respect to customer funds and
securities held by broker-dealers by ensuring the
accountability of those funds and securities and by
requiring the maintenance of accurate books and records and
sufficient liquid assets. See, e.g., 17 CFR 240.15c3-3
(prohibiting a broker-dealer from using customer funds to
finance its business, except as related to customer
transactions); 17 CFR 240.15c3-1 (prescribing minimum
capital standards for broker-dealers).
In general, registered broker-dealers also must become
members of the Securities Investor Protection Corporation
("SIPC"). SIPC was established by Congress as a means to
protect investors' funds and securities held by broker-
dealers that undergo liquidation. In addition, registered
broker-dealers are subject to the rules of the self-
regulatory organizations ("SROs") of which they are required
to be members under Section 15(b)(8) of the Exchange Act.
SRO rules, among other things, are designed to ensure the
maintenance of high standards of ethical conduct and the
observance of just and equitable principles of trade.
In instances where an issuer performs some of the functions
discussed above in connection with its DRSPP, the staff has
determined that registration as a broker-dealer is not
necessary if the issuer limits its activities as described
in Letter re: Securities Transfer Association (December
1994) or if the issuer delegates such functions to a
(continued...)
-------------------- BEGINNING OF PAGE #11 -------------------
example, the companion release invites comment on whether the
Commission should develop additional processing, bookkeeping, net
worth, and insurance requirements for transfer agents that
perform uncertificated recordkeeping functions.
-[21]-(...continued)
registered broker-dealer or to a "bank," as that term is
defined in Section 3(a)(6) of the Exchange Act.
Questions concerning broker-dealer registration should be
directed to the Office of Chief Counsel, Mail Stop 7-10,
Division of Market Regulation, Securities and Exchange
Commission, Washington, D.C. 20549.
-------------------- BEGINNING OF PAGE #12 -------------------
III. Request for Comment
The Commission is interested in receiving comment on all
aspects of the DRS Concept in addition to the specific requests
for comment made in this release.
By the Commission.
Jonathan G. Katz
Secretary
Dated: December 1, 1994