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93-45 SEC Approves Mandatory Book-Entry Settlement of Transactions in Depository-Eligible Securities

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Executive Summary

On June 11, 1993, the Securities and Exchange Commission (SEC) approved a new Section 11 of the Uniform Practice Code (UPC) requiring book-entry settlement of transactions in depository-eligible securities effected between member firms and between member firms and certain of their customers.

The amendment takes effect August 10, 1993. The text of the amendment follows this Notice.

Background

On June 11, 1993, the SEC approved a new Section 11 of the UPC requiring book-entry settlement of transactions in depository-eligible securities. The amendment is a key element in implementing the recommendations of the U.S. Working Committee of the Group of Thirty Clearance & Settlement Project (U.S. Working Committee) regarding book-entry settlement of securities transactions.1 The American Stock Exchange (Amex), the Boston Stock Exchange (BSE), the Midwest Stock Exchange (MSE), the New York Stock Exchange (NYSE), the Pacific Stock Exchange (PSE) and the Philadelphia (Phil) Stock Exchange (self-regulatory organizations or SROs) have each adopted a similar measure2.

The U.S. Working Committee recommended that:

settlements and other movements of corporate and municipal securities must be effected only by book-entry movements within a depository for transactions among financial intermediaries (brokers, dealers, and banks) and between financial intermediaries and their institutional clients.3

The new rule implements such a book-entry settlement requirement, subject to certain exceptions discussed below, for securities eligible for deposit and transfer at a securities depository registered as a clearing agency with the SEC under Section 17A of the Act.

The SEC's approval of new rules by the respective SROs will result in uniform book-entry settlement requirements for not only transactions in depository-eligible securities between SRO members, but also transactions in such securities between SRO members and their clients when settlement is on a delivery-versus-payment or receipt-versus-payment basis. Approval of these rules ensures book-entry settlement for the vast majority of securities transactions effected in the United States.

Subsection 11(a) of the new rule requires members to settle all transactions in depository-eligible securities by book-entry. Subsection 11(d) defines "depository-eligible securities" as securities eligible (1) for deposit at a securities depository and (2) for book-entry transfer. Subsection 11(c) defines "securities depository" as a depository registered with the SEC as a clearing agency.

Subsection 11(b) requires members to settle customer transactions done on a receipt-versus-payment or delivery-versus-payment basis by book-entry through a securities depository.

Pursuant to Subsection 11(e), the rule does not apply to transactions settled outside the United States, and the rule supersedes any inconsistent provisions of the UPC.

Subsection 11(g) of the new rule includes exceptions to book-entry settlement for (i) transactions for same-day settlement where the deliverer is unable to deposit the securities before a depository's cut-off time for same-day crediting of deposited securities and (ii) other special transactions (i.e., those involving corporate reorganizations or other extraordinary activities) where the deliverer is unable to deposit the securities before a depository-established cut-off date.

The new rules do not apply to or affect (a) settlement of transactions with traditional retail customers, (b) settlement of transactions in securities that are not depository-eligible, or (c) transactions where settlement occurs outside the United States.

Direct questions concerning this Notice to Dorothy L. Kennedy, Assistant Director, Uniform Practice Department, (212) 8584340, or Elliott R. Curzon, Senior Attorney, Office of General Counsel, (202) 728-8451.


1 The Group of Thirty is an independent, nonpartisan, nonprofit organization established in 1978. In 1988, the Group of Thirty initiated a project to improve the state of risk, efficiency, and cost in the world's clearance and settlement systems. See Implementing The Group of Thirty Recommendations in the United States, I-1 (November 1990).

2 The proposed rule was developed through the efforts of the Legal and Regulatory Subgroup of the U.S. Working Committee, which included representatives of the NASD, NYSE, Amex, Phil, MSE, PSE, BSE, the National Securities Clearing Corporation, The Depository Trust Company, the Municipal Securities Rulemaking Board, and the SEC's Division of Market Regulation.

3 Supra, fn. 1 at I-2.


Text of Amendment to Section 11 of the Uniform Practice Code

* * * * *

Delivery of Securities

Book-entry Settlement

Sec. 11. [RESERVED]

(a) A member shall use the facilities of a securities depository for the book-entry settlement of all transactions in depository eligible securities with another member or a member of a national securities exchange or a registered securities association.
(b) A member shall not effect a delivery-versus-payment or receipt-versus-payment transaction in a depository eligible security with a customer unless the transaction is settled by book-entry using the facilities of a securities depository.
(c) For purposes of this rule, the term "securities depository" shall mean a securities depository registered as a clearing agency under Section 17A of the Securities Exchange Act of 1934.
(d) The term "depository eligible securities" shall mean securities that (i) are part of an issue of securities that is eligible for deposit at a securities depository and (ii) with respect to a particular transaction, are eligible for book-entry transfer at the depository at the time of settlement of the transaction.
(e) This rule shall not apply to transactions settled outside of the United States.
(f) The requirements of this rule shall supersede any inconsistent requirements under other sections of the Code.
(g) This rule shall not apply to any transactions where the securities to be delivered in settlement of the transaction are not on deposit at a securities depository and:
(1) if the transaction is for same-day settlement, the deliverer is unable to deposit the securities in a securities depository prior to the cut-off time established by the depository for same-day crediting of deposited securities, or;
(2) the deliverer is unable to deposit the securities in a depository prior to the cut-off date established by the depository for that issue of securities.

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