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F
R e s e r v e Ba n k
ederal
DALLAS, TEXAS
of
Dallas
75222
C irc u la r No. 78-112
August 18, 1978
RULE
17 f —1 O F T H E
E S T A B L IS H IN G
TO
S E C U R IT IE S
R E P O R T IN G A N D
M IS S IN G ,
LOST,
AND EXCHANGE
IN Q U IR Y
C O U N T E R F E IT ,
C O M M IS S IO N
R E Q U IR E M E N T S
OR STOLEN
W IT H
RESPECT
S E C U R IT IE S
T O T H E C H IE F E X E C U T IV E O F F IC E R ,
E A C H S T A T E M E M B E R B A N K IN T H E
E L E V E N T H F E D E R A L RESER VE D IS T R IC T :
In A u g u s t o f 1 9 7 7 , th e S e c u r it ie s a n d E x c h a n g e C o m m is s io n a n n o u n c e d
th e a d o p tio n of f in a l r u le s im p le m e n tin g th e Lo st a n d S to le n S e c u r itie s P r o g r a m
u n d e r a u t h o r i t y g r a n t e d b y S e c t i o n 17 f —1 o f t h e S e c u r i t i e s E x c h a n g e A c t o f 1 9 3 4 ,
as a m e n d e d .
7 7-10 3.
A c o p y o f t h o s e r u l e s w a s f o r w a r d e d to y o u w i t h o u r C i r c u l a r N o .
T h e r u l e s p r o v i d e d t h a t , d u r i n g it s f i r s t y e a r o f o p e r a t i o n , t h e p r o g r a m
w o u ld b e c o n d u c te d on a p ilo t b a s is a n d t h a t th e d e s ig n a t io n o f S e c u r it ie s In f o r m a
tio n C e n t e r , I n c . , as th e C o m m is s io n 's d e s ig n e e f o r r e c e iv i n g r e p o r ts a n d r e
s p o n d i n g to i n q u i r i e s on o t h e r t h a n U . S . G o v e r n m e n t a n d A g e n c y s e c u r i t i e s w o u l d
te rm in a te a t th e end of th e p ilo t y e a r .
T h e p i l o t p r o g r a m is d u e to e x p i r e o n
D e c e m b e r 31, 1978.
A s i n d i c a t e d b y t h e F e d e r a l R e g i s t e r n o t i c e , w h i c h is p r i n t e d o n t h e
f o l l o w i n g p a g e s , t h e C o m m i s s i o n is n o w s o l i c i t i n g p u b l i c c o m m e n t o n t h e p r o v i
s io n s a n d o p e r a t io n of th e p r o g r a m a n d o n th e r e d e s ig n a t io n of th e S e c u r itie s
I n f o r m a t i o n C e n t e r , I n c . , to m a i n t a i n a n d o p e r a t e t h e d a t a b a s e o f r e p o r t e d m i s s
in g ,
lo s t, c o u n t e r f e it , o r s to le n s e c u r itie s f o r a n a d d itio n a l s p e c ifie d p e r i o d .
P e r s o n s w i s h i n g to s u b m i t w r i t t e n v i e w s , d a t a , a n d c o m m e n t s s h o u l d f o r w a r d
t h r e e c o p i e s t h e r e o f to:
G e o rg e A . F itzs im m o n s , S e c r e ta ry
S e c u r it ie s a n d E x c h a n g e C o m m is s io n
W a s h in g to n , D . C .
20549
S u c h c o m m en ts m u s t b e r e c e iv e d b y th e C o m m is s io n on o r b e fo r e
S e p te m b e r 8, 1978.
S in c e re ly y o u rs ,
R o b e rt H . B o y k in
F irs t Vice President
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
E x tra c t From
Federal Register,
V O L . 4 3 , N O . 152,
M o n d a y , A u g u s t 7 , 1978
p p . 34790 - 34794
[8010- 01]
SECURITIES AND EXCHANGE
COMMISSION
[1 7 CFR Pari* 2 4 0 , 2 4 1 , a n d 2 4 9 ]
[ R e le a s e N o. 34-15015; F ile N o. S 7 -6 1 1 ]
LOST A N D STOLEN SECURITIES
A d v o n c * N otica o f Infant To E n gag* in
R ulem aking
AGENCY: Securities and Exchange
Commission.
ACTION: Advance notice of intent to
engage in rulemaking.
SUMMARY: The Commission re
quests comment on the provisions and
operation of the Lost and Stolen Secu
rities Program and on the redesigna
tion of the Securities Information
Center, Inc. ("SIC”) to maintain and
operate the data base o f reported
missing, lost, counterfeit or stolen se
curities. In initially implementing the
Lost and Stolen Securities Program,
the Commission provided that its first
year of operation would be conducted
on a pilot basis and that the designa
tion of SIC would terminate at the
end of the pilot year. Comments are
solicited in order that the Commission
may assess whether modifications to
the Lost and Stolen Securities Pro
gram may be appropriate and whether
a redesignation of SIC should be made
for an additional specified term.
DATE: Comments must be received on
or before September 8, 1978.
ADDRESS: Persons wishing to submit
written views, data, and comments
should file three copies thereof with
George A. Fitzsimmons, Secretary, Se
curities and Exchange Commission,
Washington, D.C. 20549. All submis
sions should refer to File No. S7-611
and will be available for public inspec
tion.
FOR FURTHER INFORMATION
CONTACT:
Gregory C. Yadley, Division of
Market Regulation, Securities and
Exchange Commission, Washington,
D.C. 20549, telephone 202-376-8129.
SUPPLEMENTARY INFORMATION:
In order to facilitate conversion of the
pilot phase of the Lost and Stolen Se
curities Program (the “Program”) to a
more permanent basis, the Commis
sion has determined that it is appro
priate at this time to solicit comments
concerning the provisions and oper
ation of the Program. Subsequent to
the review and analysis of these com
m ents by the staff of the Commission,
th e Commission may propose amend
m ents to rule 1 7f-l (17 CFR 240.17f-l)
reflecting the views of interested per
sons submitted in response to this re
lease.
B
ackground
Problems relating to missing, lost,
counterfeit or stolen securities were
outlined by the Commission, in 1970 1
and were subsequently the subject of a
series of Congressional hearings.2 Im
plementation of a system to receive re
ports and inquiries concerning miss
ing, lost, counterfeit and stolen securi
ties was recommended by members of
Congress, th e industry, and law en
forcement agencies. To accomplish
this objective, the Securities Acts
Amendments of 1975 3 introduced new
section 17(f)(1) into the Securities Ex
change Act. of 1934 (the “Act”) and
provided that certain financial institu
tions 4shall make reports and inquiries
with respect to missing, lost, counter
feit or stolen securities in accordance
with rules promulgated by the Com
mission. The section also provides that
reports and inquiries shall be made to
the “Commission or other person des
ignated by the Commission” and that
reasonable fees may be charged for
th e processing of such data.
On December 6, 1976, the Commis
sion adopted §240.17f-l establishing
reporting and inquiry requirements
with respect to missing, lost, counter
feit or stolen securities.® On August 5,
1977, the final, amended version of the
section was published,6 and on Janu1 S tu d y o f U n s a fe a n d U n s o u n d P ra c tic e s
o f B ro k e rs a n d D e a le rs , R e p o r t a n d R e c o m
m e n d a tio n s o f t h e S e c u r itie s a n d E x c h a n g e
C o m m issio n ( p u r s u a n t to s e c tio n 1 1 (h ) o f
t h e S e c u ritie s I n v e s to r P r o te c tio n A c t o f
1970), D e c e m b e r 1970.
‘ O rg a n iz e d
C rim e —S to le n
S e c u ritie s ,
h e a r in g s b e f o re t h e P e r m a n e n t S u b c o m m it
t e e o n I n v e s tig a tio n s , S e n a te C o m m itte e o n
G o v e r n m e n t O p e r a tio n s , 92d C o n g ., 1 st
S e ss. (1971); 93d C o n g ., 1 st S ess. (1973); 93d
C o n g . 2 d S ess. (1974).
" P u b . L. 94-29 ( J u n e 4, 1975).
‘ T h e in s titu tio n s s u b je c t to s e c tio n
17 (f)(1 ) a r e e n u m e r a te d in t h e s t a t u t e a s
fo llow s: E v e ry n a tio n a l s e c u ritie s e x c h a n g e ,
m e m b e r th e r e o f , r e g is te r e d s e c u ritie s a sso c i
a tio n , b r o k e r, d e a le r, m u n ic ip a l s e c u ritie s
d e a le r , r e g is te r e d t r a n s f e r a g e n t, r e g is te r e d
c le a r in g
agency,
p a r tic ip a n t
th e r e in ,
m e m b e r o f t h e F e d e r a l R e s e rv e S y ste m , a n d
b a n k w h o se d e p o s its a r e in s u r e d b y t h e F e d
e r a l D e p o s it I n s u r a n c e C o rp o ra tio n .
5S e c u r itie s E x c h a n g e A c t R e le a s e N o.
13053, 41 F R 54923 (D e c e m b e r 6, 1976). C e r
t a i n te c h n ic a l a m e n d m e n ts t o t h e s e c tio n
w e re m a d e b y t h e C o m m issio n in S e c u r itie s
E x c h a n g e A c t R e le a s e N o. 13280, 42 F R
11829 (M a rc h 1, 1977). F u r t h e r a m e n d m e n ts
r e g a r d in g t h e r o le o f tr a n s f e r a g e n ts i n t h e
p r o g ra m w e re p ro p o s e d in S e c u r itie s E x
c h a n g e A c t R e le a s e N o. 13281, 42 F R 11844
( M a rc h 1, 1977) a n d in c o r p o ra te d in to t h e
r u le in S e c u r itie s E x c h a n g e A c t R e le a s e N o.
13832, 42 F R 41022 (A u g u s t 12, 1977).
‘ S e c u ritie s E x c h a n g e A c t R e le a s e N o.
13832, 42 F R 41022 (A u g u s t 12, 1977).
ary 2, 1978, the computerized system
for the processing of reports and in
quiries became fully operational.
In order to monitor the effectiveness
of S 240.17f-l and the system designed
to carry out its provisions, the Com
mission determined that the lost and
stolen securities program should be in
stituted Initially on a pilot basis,
through December 31, 1978. Further
more, the Commission determined
that it would be appropriate to desig
nate another person, as provided for in
the statute, to receive and process the
reports and inquiries for which the
Commission is the appropriate instru
mentality, as defined by the sectio n 1
at. least for purposes of the pilot pro
gram. Accordingly, the Commission so
licited plans from persons interested
in acting as the Commission’s desig
nee, and, after analysis of the submis
sions, designated the Securities Infor
mation Center, Inc. (“SIC”) to act on
its b e h a lfa through the pilot year
ending December 31,1978.
cation of the section w ith respect to
such Institutions. Similarly, it may be
appropriate to broaden th e scope of
the section to include additional
classes of financial institutions or to
impose greater requirements on cer
tain classes or subclasses of institu
tions. The Commission invites com
m ents on these issues and seeks assist
ance in identifying appropriate crite
ria for making such determinations.
2.
Securities encompassed bp
§ 240.17/-1. Although section 17(f)(1)
of the act applies to all securities,
under S240.17f-1, securities issues for
which CUSIP numbers have not been
assigned are exempted from the re
porting and inquiry provisions of the
program. Comments are requested
concerning the appropriateness of this
exemption, its permanent incorpora
tion into the section, and whether
other types of securities should be
exempted.
3. Appropriate Instrumentalities.
Section 240.17f-l specifies that reports
and inquiries shall be made to the “ap
propriate instrumentality.” For securi
SOLICITATION OF PUBLIC COMMENTS
ties issued by the U.S. Government, an
Inasmuch as the pilot year and SIC’s agency or instrumentality of the U.S.
term of designation will expire on De Government, the International Bank
cember 31, 1978, the Commission solic for Reconstruction and Development,
its public comment at this time on the the Inter-American Bank, or the Asian
provisions of § 240.17f-l, the operation Development Bank, the appropriate
of the program to date, and on the instrumentality is any Federal Reserve
question whether it would be appro Bank or Branch.10 For reports and in
priate for the Commission to redesig quiries regarding all other securities,
nate SIC to receive and process re the appropriate instrumentality is the
ports and inquiries made pursuant to Commission or its designee. This bifur
cation of the responsibility for the
the section.
To focus the attention of public processing of reports and inquiries re
commentators, those aspects of the sulted, in part, from the desire to take
program which are of particular con advantage of the information con
cern to the Commission are outlined tained on the Federal Reserve Banks’
below. Public comment relative to “Checklist of Lost or Stolen Securi
these issues will assist in the formula ties.” At the time of the enactment of
tion of appropriate amendments to section 17(f) of the act, this manually
accessed checklist had been used by
the section.
1. Institutions subject to %240.17f-l. member banks of the Federal Reserve
The financial institutions required to System for nearly 6 years.'1
Information is requested from inter
make reports and inquiries with re
spect to missing, lost, counterfeit, or ested members of the public as to
stolen securities pursuant to § 240.17f- whether the framework of dual appro
1 include nearly 20,000 institutions priate instrumentalities provided by
and a broad variety of securities and the section is appropriate or whether a
banking entites." Preliminary research unified central data base would be
In addition, comments as
suggests that it may be appropriate to preferable.
exem pt from the operation of the sec to any difficulties experienced due to
tion certain classes or subclasses of the concept or operation of the two
instrumentalities are in
these institutions or to limit the appli appropriate
vited.
With respect to corporate and mu
7U n d e r § 2 4 0 .1 7 f-l, r e p o r ts a n d In q u irie s
nicipal securities, the Commission de
a r e d ir e c te d t o t h e “ a p p r o p r ia te in s tr u m e n
t a l i t y .” I n t h e c a s e o f U .S . G o v e r n m e n t s e
c u r itie s , t h e a p p r o p r ia te i n s tr u m e n ta lity is
a n y F e d e r a l R e se rv e B a n k o r b r a n c h t h e r e
o f. T h e C o m m issip n Is t h e a p p r o p r ia te in
s tr u m e n ta lity f o r a ll o t h e r s e c u ritie s , in
c lu d in g S t a t e a n d m u n ic ip a l issu es.
• S e c u r itie s E x c h a n g e A c t R e le a s e N o.
13538, 42 F R 26495 (M a y 24, 1977). A u tE x ,
In c . w as o rig in a lly n a m e d a s t h e d e sig n e e .
S u b s e q u e n tly , a s a r e s u lt o f t h e a c q u is itio n
o f A u tE x b y IT E L C o rp ., S IC w as c r e a te d a s
a w h o lly o w n e d s u b s id ia ry o f IT E L C o rp .
’See n o te 4, supra.
‘
f e c t i o n 2 4 0 .1 7 f-l(a )(2 )(i).
“ D u r in g t h e d r a f tin g s ta g e s o f r u le 1 7 f -l,
t h e F e d e r a l R e s e rv e B a n k s o f fe re d to se rv e
a s a n a p p r o p r ia te i n s tr u m e n ta lity o n a
“te m p o r a r y " b a s is in o r d e r to f a c ilita te inp le m e n ta tio n o f s e c tio n 17(f). A t t h a t tim e ,
it w as u n d e r s to o d t h a t t h e F e d e r a l R e s e rv e
B a n k w o u ld n o t b e h e ld to a p e r m a n e n t
c o m m itm e n t b u t w o u ld c o n s id e r a t a la t e r
d a te w h e th e r i t w as d e s ira b le to c o n tin u e to
p la y s u c h a n a c tiv e ro le in t h e C o m m issio n 's
p ro g ra m .
termined to exercise its authority tc
designate another entity to process re
ports and inquiries. As stated earlier
SIC's term as the Commission’s desig
nee expires on December 31,1978. The
Commission must, therefore, eithei
designate SIC for another specified
period of time or designate another
entity to receive and process the re
ports and inquiries made pursuant to
the section. While the staff’s experi
ence with SIC has been positive and
unofficial comments from Industry
sources have been favorable, the Com
mission, in conformity with concepts
of fairness, solicits submissions from
other persons interested in serving as
the Commission’s designee. “
In formulating submissions to the
Commissison; prospective designees
should consider carefully the “Criteria
for a Lost and Stolen Securities Re
porting and Inquiry System ” set forth
in the Appendix, and should detail the
manner in which their proposed
system would operate, and include an
estimate of the costs for establishment
and operation of such a system and a
plan for allocation of such costs.
Additionally, in order to assist the
Commission in its evaluation of SIC
and its processing system, and to aid
in the formulation of system improve
ments, comments are invited from in
terested persons concerning their ex
perience in working with SIC, their
suggestions for modifications of the
design and operation of its system, and
the appropriate number of years for
which a designation should be made.
4.
Reporting requirement Section
240.17f-l provides that all institutions
subject to its provisions shall report
the discovery of the loss of any securi
ty to the appropriate instrumentality
and to a registered transfer agent for
the issue. A report to the appropriate
law enforcement agency is also re
quired in cases of suspected criminal
ity. The section sets forth differing
time requirements within which such
reports shall be made, depending on
the type of loss involved and the cir
cumstances involved in the loss.13 The
attention of commentators is directed
towards the appropriateness of these
time requirements and the possibility
that other circumstances exist that
might make desirable the inclusion in
the section of new time frames appli
cable to such circumstances.
All reports of loss are required to be
made on Commission Form X-17F-1A.
The Commission solicits suggestions
regarding appropriate modifications in
“ S e c tio n 1 7 (f)(1 )(A ) o f t h e a c t d o e s n o t
r e q u ire t h a t a d e s ig n a tio n b e m a d e b u t p r o
v id es t h a t r e p o r ts a n d in q u irie s s h a ll b e
m a d e t o t h e C o m m issio n o r o t h e r p e rs o n
d e s ig n a te d b y t h e C o m m issio n .
“ F o r e x a m p le , if t h e r e Is a s u b s ta n tia l
b e lie f t h a t c r im in a lity is in v o lv ed in t h e
lo ss, t h e r e p o r t m u s t b e m a d e o n e d a y a f t e r
d isc o v ery . S e c tio n 2 4 0 .1 7 f-l(b )(lX l).
th e format and graphics of th e form,
as well as the information required to
be submitted on the form, in order to
facilitate its use, make it more infor
mative, and encourage its use by the
transfer agent community as a "uni
form stop transfer order form.” Com
ments are also requested as to wheth
er copies of the reporting form. Form
X-17F-1A, should be sent to other en
tities.14
5.
Inquiry requirements. Section
240.17f-l requires reporting institu
tions to make inquiry whenever securi
ties come into their possession or
keeping unless an exemption applies.
The section does not specify the time
at which such inquiries must be made.
It is expected, however, that a report
ing institution will make inquiry prior
to giving value, particularly if the se
curities or circumstances appear to be
suspicious, in order to verify that the
securities have not been reported as
missing, lost, counterfeit or stolen.
Comments are welcome as to whether
amendment of the section to require
Inquiry within certain specified time
periods would be desirable and, if so,
the appropriate lengths of such time
periods.
Presently, the section provides that
a reporting institution need not in
quire if the security is received: (1) Di
rectly from the issuer or issuing agent
at issuance; (2) from another reporting
institution or a Federal Reserve Bank
in its capacity as fiscal agent; or (3)
from a customer of the reporting insti
tution and is registered in the name of
such customer or its nominee.15 In ad
dition, for the purposes of th e pilot
program only, certain additional ex
emptions from inquiry are available:
Corporate and municipal security
issues not assigned CUSIP numbers “
and receipts involving securities of
$10,000 or less are exempt, as are in
quiries by registered transfer agents.”
Specific comments are solicited as to
the desirability of continuing or incor
porating permanently into § 240.17f-l
these special exemptions. With respect
to the $10,000 de minimus exemption
from inquiry, comments are sought
concerning whether the exemption
amount should be lowered to bring a
greater number of transactions into
the scope of the inquiry provisions, or
whether it should be raised, to focus
on those transactions with the great
est potential losses. Comments are also
invited as to whether the exemption
amount should vary, depending on the
nature of the security involved. Final
ly, comments regarding the appropri
ateness of additional exemptions from
required inquiry, on either a provision
al or a permanent basis, are solicited.1'
F. System design and fee structure.
The SIC processing system provides
for two levels of user access with re
spect to inquiries. A reporting institu
tion m ust choose to be either a “direct
inquirer” or an “indirect inquirer” at
the time of its registration in the Pro
gram. Direct inquiries have the ability
to access the data base directly while
indirect inquirers m ust process their
inquiries through a direct inquirer.
This scheme of classification for par
ticipation was created with a view to
wards ^minimizing the monetary and
administrative costs of the program.
This interest also guided th e Commis
sion in its formulation of th e pricing
schedule for reporting institutions.1*
Usage fees are based on the aggregate
volume of items processed by SIC and
are apportioned among the direct in
quirers according to classifications
based on size.” This billing structure
was deemed to be preferable to a “per
item ” or a “flat fee” system because it
would avoid any disincentive to
making permissive inquiries of the
system and would allocate the costs of
the program in a reasonable manner.
Under this scheme, the smallest insti
tutional classifications of direct inquir
ers have been charged $26.75 over the
first two quarters of the pilot year
without any limitation on the number
of reports and inquiries submitted.
In formulating the pricing schedule,
the Commission attempted to mini
mize the fees applicable to smaller in
stitutions in the expectation that they
would choose direct inquirer status.
Such has not been the case; only one
half of the originally estimated
number of direct Inquirers actually
elected this status. Comments from in-
18 F o r e x a m p le , i t h a s b e e n in f o rm a lly s u g
g e s te d t o t h e s t a f f t h a t in q u iry s h o u ld n o t
b e r e q u ir e d in t h e c a s e o f b e a r e r s e c u ritie s
w h e re t h e i n s titu tio n ta k in g s u c h s e c u ritie s
in to its p o ss e s sio n so ld s u c h s e c u ritie s to t h e
p e r s o n d e liv e rin g th e m a n d p r o o f o f p u r
c h a s e is o ffe re d .
“ D ir e c t in q u ir e r s s h o u ld e r t h e c o s ts o f
t h e sy s te m . I n d ir e c t in q u ire rs a r e c h a r g e d
n o fe e s b y S IC b u t , r a t h e r , a r e s u b je c t to
w h a te v e r fe e s t h e y a g r e e t o p a y t h e i r d ir e c t
14I t h a s b e e n In fo rm a lly su g g e s te d to t h e
in q u ire r. O n e b e n e f it o f t h i s a p p r o a c h is
s t a f f t h a t t h e d e s ig n a te d e x a m in in g a u t h o r
t h a t i t s ig n if ic a n tly a lle v ia te s p ro b le m s r e
i t y o f a b ro k e r- d e a le r s h o u ld re c e iv e a co p y
la tin g t o t h e f r e q u e n t c o lle c tio n o f s m a ll
o f t h e fo rm in o rd e r to b e t t e r a s s is t th e m in
b ills f ro m la r g e n u m b e r s o f p e rs o n s , a p r o b
t h e i r m o n ito rin g o f t h e a c tiv itie s o f t h e ir
le m w h ic h t h e S e c u r itie s I n v e s to r s P r o te c
m e m b e rs.
tio n C o rp . h a s e x p e rie n c e d to a g r e a t e x t e n t
“ S e c tio n 2 4 0 .1 7 f-l(c )(l)(i)-(iii).
in its c o lle c tio n o f a s s e s s m e n t fees.
“ C o n s e q u e n tly , s h o r t te r m s e c u ritie s s u c h
10 B illin g c la s s ific a tio n s a r e b a s e d o n t h e
a s c o m m e rc ia l p a p e r a r e n o t s u b je c t to t h e
a m o u n t o f d e p o s its f o r b a n k s , a n n u a l re v e
r e q u ire m e n ts o f § 2 4 0 .1 7 f-l d u r in g t h e p ilo t
nue
fo r
s e c u ritie s
o rg a n iz a tio n s , a n d
p ro g ra m .
17 See S e c u r itie s E x c h a n g e A ct R e le a s e N o. n u m b e r o f s h a r e s iss u e d in t h e ca se o f n o n
b a n k t r a n s f e r a g e n ts .
13832, 42 F R 41024 (A u g . 12, 1977).
terested persons are solicited as to
w hether the direct/indirect inquirer
status option has achieved its purpose
of making the benefits of the program
available to all institutions subject to
section 17(f)(1) of the act, while mini
mizing their costs and, in addition,
whether this billing system, which is
based on the size of the institution,
has proven just and workable and,- if
not, what alternatives should be con
sidered.
REQUEST FOR COMMENTS REGARDING
STAFF INTERPRETATIONS OF * 2 4 0 . 1 7 f - l
Since the implementation of the
program, the staff of the Commission
has issued several interpretations and
no action letters concerning various
provisions of 5 240.17f-l. In this
regard, the Commission solicits com
m ent as to whether they should be
provisionally or permanently incorpo
rated into the section. Several of the
specific areas addressed are summa
rized as follows:
REPORTING PROVISIONS
1. Warrants. The staff declined a re
quest that warrant cards, representing
rights, be exempted from the report
ing provisions of § 240.17f-l. The ratio
nale for this position is that although
individual rights are generally of mini
mal value, the number of rights repre
sented by a warrant card is correlated
to the number of shares a stockholder
owns and, thus aggregated, can have a
considerable value.'1
2. Losses during completion of deliv
ery, deposit or withdrawal With
regard to subsections (b)(2)(ii)(B) and
(b)(2)(iii)(C) of the section, regarding
the time and party to report a loss
when securities are delivered “over the
window,” the staff published an inter
pretation stating that copies of deliv
ery bills, stamped by receiving institu
tions “Received Subject to Count and
Examination” and returned to deliver
ing institutions, are "receipts” under
the section and thereby create an obli
gation on the part of the receiving in
stitution to report any losses to the
appropriate instrumentality.21
3. Timely submission of report. Due
to the difficulties certain institutions
have faced in researching the data re
quired to be submitted in the report of
loss, the staff has published interpre
tations of the reporting requirements
of the section stating that in instances
where no criminal activity is suspected
a report must be made under subpara
graph (b)(2) of the section as soon as
the reporting institution has available
to it the CUSIP and certificate
11
L e tte r t o M o rg a n G u a r a n ty T r u s t C o .,
d a te d M a r. 13, 1978 (p u b lic a v a ila b ility d a te
A p r. 13, 1978).
“ L e tte r t o N o r th w e s te r n T r u s t C o., d a te d
F e b . 28, 1978 (p u b lic a v a ila b ility d a te M a r.
2 9 ,1 9 7 8 ).
number o f th e security, provided, how gram, inquiry is not required In the
ever, that the institution acts in good case of transactions involving securi
faith in promptly researching this ties of less than $10,000 (face value in
data. This extension of time is not th e case of bonds and market value in
available, however, where the circum the case of stocks). T he staff of the
stances surrounding the loss suggest Commission, however, has interpreted
this exemption to include securities up
possible criminal activity.”
4. Report to Law Enforcement. Sub to and including $10,000 exactly, in
paragraph (bXii) of S 240.17f-l pro recognition of the fact that most debt
vides that all reporting institutions securities are issued in $5,000 face
shall promptly report to the appropri value denominations, and in the inter
ate law enforcement agency upon the est of reducing the burden imposed by
discovery of the theft or loss of any se the section on municipal securities
curity where there is a substantial brokers and dealers.” In addition, the
basis for believing that criminal activi staff has interpreted this exemption
ty was involved. <To clarify those in to apply not to the individual certifi
stances where such reports should be cates involved in a transaction, but
submitted to law enforcement, the rather to the transactions as a whole. “
4. Transfer agent exemption. For the
staff issued an interpretation stating
that an institution does not necessar purposes of the pilot program, regis
ily have a "substantial basis” for such tered transfer agents are exempted
a belief in those instances where the from §2 4 0.I7 f-l’s requirements that
institution’s knowledge of the loss or reporting institutions inquire with re
th eft is based on unsubstantiated in spect to securities coming into their
formation given to it by another possession or keeping. The staff of the
Commission has interpreted this ex
party.*4
emption to be applicable to a transfer
agent engaged as an exchange, conver
INQU IRY PROVISIONS
sion, or redemption agent or deposi
1. Exemption upon receipt from an tory or tender agent (whether such
other reporting institution. In an in transfer agent is acting as the issuer’s
terpretative letter, the staff expressed transfer agent or as a depository or
th e opinion that the exemption from tender agent in connection with a soinquiry available upon receipt of secu called "unfriendly tender offer”), as
rities from another reporting institu long as such transfer agent maintains
tion is also available in those instances or is provided with current and accu
where the delivering institution is af rate records of stop transfer instruc
filiated with and under the common tions and inquiry of such records is
control of a reporting institution and made for each item received prior to
acts solely as a "certificate drop.” ”
Issuing a new certificate, transferring
2. Exemption upon receipt from a record ownership, disbursing funds, or
Federal
Reserve Bank.
Under otherwise completing th e transac
S 240.17f-l(c)(i), inquiry is not re tion."
quired in instances where a reporting
institution receives securities from a REQUEST FOR COMMENTS REGARDING PRO
Federal Reserve Bank in its capacity
VISIONS AND OPERATION OF 9 2 4 0 .1 7 F -1
as fiscal agent. This exemption is not
Inasmuch as the pilot year and SIC’s
available under the section, therefore,
when securities are delivered by the term of designation expire on Decem
Federal Reserve Bank from a safe ber 31, 1978, th e Commission solicits
keeping account. The staff has issued public comment at this time on the
an interpretation providing that when provisions and operation to date of
securities are delivered to a reporting §240.17f-l, on the appropriateness of
institution by the Federal Reserve th e continued applicability of the spe
Bank out of the safekeeping account cial pilot program exemptions, and the
of another reporting institution and redesignation of SIC to receive and
such securities had been delivered to process reports and inquiries made
th e Federal Reserve Bank by a report pursuant to the section. In particular',
ing institution, inquiry is not re th e Commission solicits comments perquired.*
3. The $10,000 de minimus exemp
” L e tte r t o F e d e r a l R e s e rv e B a n k o f S t.
tion. In order to ease implementation L o u is, d a te d J a n . 12, 1978 ( p u b lic a v a ila b il
o f § 240.17f-l during the pilot pro- ity d a te F e b . 12, 1978). A lth o u g h t h e r a t i o
" L e t t e r t o F i r s t T r u s t C o. o f S t. P a u l,
d a te d M a r. 20, 1978 (p u b lic a v a ila b ility d a te
A p r. 2 0 ,1 9 7 8 ).
“ L e t t e r t o C o n tin e n ta l S to c k T r a n s f e r &
T r u s t C o., d a te d J a n . 12, 1978 (p u b lic a v a il
a b ility d a te F e b . 12. 1978).
“ L e tt e r t o F i r s t N a tio n a l B a n k o f B o s to n ,
d a te d J a n . 12. 1978 (p u b lic a v a ila b ility d a te
F e b . 1 2 ,1 9 7 8 ).
" L e t t e r t o B a n k e rs T r u s t C o., d a te d M a r.
21, 1978 (p u b lic a v a ila b ility d a te A p r. 21.
1978).
n a le w as b a s e d o n t h e s itu a tio n p r e s e n te d
b y d e b t s e c u rity tr a n s a c tio n s , in o r d e r t o
av o id c o n fu s io n t h e in t e r p r e t a ti o n w as d e
sig n e d t o a p p ly t o e q u ity s e c u ritie s a s w ell.
“ F o r e x a m p le , w h e re f o u r $5,000 b o n d s
a r e u s e d a s c o lla te r a l f o r a s in g le lo a n , t h e
t o t a l tr a n s a c tio n e x c e e d s $10,000, a n d t h e
)1 0 ,0 0 0 d e m in im u s e x e m p tio n f ro m in q u iry
m a y n o t b e cla im e d . S e e l e t t e r t o L a S a lle
N a tio n a l B a n k , d a te d D ec. 7, 1977 (p u b lic
a v a ila b ility d a te J a n . 7 ,1 9 7 8 ).
“ L e tt e r t o t h e S to c k T r a n s f e r A ssoci
a tio n , d a te d M a r. 8, 1978 (p u b lic a v a ila b ility
d a te A p r. 8 ,1 9 7 8 ).
tjdntng to the Items enumerated
below. In responding, all commenta
tors should attem pt to furnish the
Commission with data supporting
their views to the greatest extent pos
sible.
1. W hether any classes or subclasses
of institutions defined as “reporting
institutions’’ under 8 240.17f-l should
be exempted from th e provisions of
the section and whether any class or
subclass of institution within the juris
diction of th e Commission not now
subject to the section should be in
cluded in the program;
2. W hether the present exemption
from the program of securities of an
Issue not assigned a CUSIP Number
should continue and whether other
types of securities should also be
exempted;
3. W hether the present framework
of dual appropriate instrumentalities
is appropriate or whether a unified
central data base would be preferable,
and, particularly, whether the concept
or operation of the two appropriate in
strumentalities has resulted in any dif
ficulties in complying with the section;
4. W hether the Commission should
redesignate SIC or designate another
entity for the purposes of receiving
and processing reports and inquiries
made pursuant to the section.10
5. W hether the time requirements
within which reports must now be
made are appropriate and whether
other circumstances exist for which
specific tim e requirements should be
provided;
6. W hether the report form. Form
X-17F-1A, should be modified in
terms of its format and graphics and
In terms of th e information required,
and whether the form has proven
useful to identify and trace missing,
lost, counterfeit and stolen securities;
7. W hether inquiries should be made
within certain time periods and, if so,
within what time periods;
8. W hether the exemptions from in
quiry provided for the purposes of the
pilot program should be continued,
continued in a modified form, or al
lowed to lapse, and, particularly,
whether the present de minimus ex
emption for transactions Involving se
curities of $10,000 or less (face value in
th e case of bonds and market value in
the case of stocks) should be in
creased, decreased, made a permanent
part of the rule, or allowed to lapse;
9. W hether additional exemptions
from inquiry should be permitted on
either a provisional or permanent
basis;
W hether the present program allow
ing for an election of participation
status as either a direct or an Indirect
“ P e rs o n s i n te r e s te d In a c tin g a s t h e C o m
m is s io n ’s d e s ig n e e s h o u ld s u b m it a p la n f o r
t h e i r p r o g ra m i n a c c o rd a n c e w ith t h e
I n s tr u c tio n s o u tlin e d i n A p p e n d ix A.
inquirer is appropriate, whether the
present pricing structure is just and
workable, and w hether reasonable al
ternatives to this system exist;
11. W hether the staff interpreta
tions of §240.17f-l, described above,
should be modified and/or incorporat
ed into the section; and
12. W hether any other aspect of
8 240.17f-l and the Program not enu
merated above should be modified in
any way.
The Commission invites comments
on any of the matters raised above.
Comments should be addressed to
George A. Fitzsimmons, Secretary, Se
curities and Exchange Commission,
500 North Capitol Street, Washington,
D.C. 20549. All comments should refer
to File No. S7-611 and will be available
for public inspection.
By the Commission.
G e o r g e A . F itz s im m o n s ,
Secretary.
J u ly
31,1978.
A p p e n d ix
C R IT E R IA FO R A L O ST AND STO LEN S E C U R IT IE S
R E P O R T IN G AND IN Q U IR Y SY ST E M
T h e C o m m issio n su g g e s ts t h a t a n y p e rs o n
in te r e s te d In s e rv in g a s t h e C o m m issio n ’s
d e s ig n e e f o r t h e p ro c e ss in g o f r e p o r ts a n d
In q u irie s u n d e r § 2 4 0 .1 7 f-l c o n s id e r t h e fo l
lo w in g c r ite r ia in d e v e lo p in g p la n s f o r s u b
m issio n . W h ile t h e C o m m issio n b e lie v e s
t h a t t h i s p r o g ra m m a y b e b e s t Im p le m e n te d
b y a s y s te m c o n ta in in g t h e fo llo w in g c h a r
a c te r is tic s , t h e C o m m issio n e n c o u ra g e s t h e
s u b m is sio n o f a lte r n a tiv e s w h ic h w o u ld im
p le m e n t $ 2 4 0 .1 7 f-l in a n e f fic ie n t m a n n e r .
GENERAL C O N SID E R A T IO N
I n f o rm u la tin g a s y s te m f o r t h e r e c e ip t
a n d p ro c e ss in g o f r e p o r ts a n d in q u irie s r e la
tiv e t o lo s t a n d s to le n s e c u ritie s , p ro s p e c tiv e
d e s ig n e e s s h o u ld b e m in d fu l o f t h e C o m m is
s io n ’s o v e rrid in g i n t e r e s t in p ro v id in g in s ti
t u tio n s s u b je c t to § 2 4 0 .1 7 f-l a m e a n s f o r
c o m p lia n c e t h e r e w ith w h ic h is low in c o s t,
f le x ib le t o m e e t v a rie d a n d c h a n g in g n e e d s,
a n d re a d ily u n d e r s ta n d a b le f ro m a u s e r ’s
s ta n d p o in t. T h e d e s ig n e e w ill b e s u b je c t to
c o n tin u in g d ir e c tio n a n d rev iew b y t h e C o m
m issio n . I t is c o n te m p la te d t h a t t h e d e sig
n e e w ill o p e r a te a m a n u a l, c o m p u te r-a s s is t
e d s y s te m . T o g u a r d a g a in s t m isu s e o f t h e
s y s te m , p ro p o s e d s y s te m s s h o u ld p ro v id e
a d e q u a te s e c u rity p ro c e d u re s f o r t h e i r o p e r
a tio n a l f a c ility a n d f ile s a s w e ll a s a m e a n s
b y w h ic h t h e id e n tity o f t h e r e p o r tin g o r In
q u ir in g in s titu tio n m a y b e v e rifie d a s a n a u
t h o r iz e d s u b s c rib e r.
T h e in c re a s e d u s e o f s e c u ritie s d e p o s i
to r ie s a n d b o o k -e n try r e c o rd k e e p in g h a s t h e
p o te n tia l o v e r a p e rio d o f tim e t o g r e a tly
r e d u c e t h e lo s t a n d s to le n s e c u ritie s p ro b
le m , a n d c o n s e q u e n tly , t h e sc o p e o f t h e
C o m m issio n ’s p r o g ra m . A cc o rd in g ly , t h e
s ta r t - u p c o s ts o f a n y s y s te m to im p le m e n t
§ 2 4 0 .1 7 f-l s h o u ld b e a s low a s p o ssib le .
R E P O R T IN G AND IN Q U IR Y C O N SID E R A T IO N S
T h e " r e p o r tin g i n s titu tio n s ” s u b je c t t o
§ 2 4 0 .1 7 f-l w ill in c lu d e e n titie s o f d if fe r in g
siz e, g e o g ra p h ic lo c a tio n , a n d f re q u e n c y o f
c o n ta c t w ith t h e s y s te m . C o n s e q u e n tly , p r o
p o se d s y s te m s s h o u ld h a v e s u f f ic ie n t fle x i
b ility t o d e a l w ith t h e s e I n s titu tio n s a s t h e i r
n e e d s r e q u ire . T h is f le x ib ility s h o u ld e n ta il
t h e c a p a c ity t o re c e iv e r e p o r ts s u b m itte d v ia
t h e m a ils, te le p h o n e , a n d te le x . C o n s id e ra
tio n s h o u ld a ls o b e g iv e n t o d e s ig n in g a
s y s te m t h a t w o u ld a llo w h ig h v o lu m e e n t i
tie s t h e c a p a b ility o f c o m p u te riz e d o r o n
lin e in p u t.
P ro s p e c tiv e d e s ig n e e s s h o u ld a ls o p ro v id e
f o r t h e p r o m p t r e c e ip t a n d I n c o rp o r a tio n o f
r e p o r t s in to a c o m p u te riz e d r e c o r d file . P r o
p o s e d s y s te m s s h o u ld h a v e t h e c a p a c ity to
in c lu d e w ith in t h e d a t a b a s e r e p o r t s o f se c u
r itie s lo sses, c o u n te r fe its , a n d t h e f t s o c c u r
r in g p r io r to t h e e ffe c tiv e d a te o f § 2 4 0 .1 7 f-l
a s w ell a s a ll r e p o r ts m a d e s u b s e q u e n t to
t h e e ffe c tiv e d a te o f t h e s e c tio n . T h e s y s te m
s h o u ld a ls o in c lu d e a p r o c e d u r e b y w h ic h r e
p o r ts a r e re m o v e d f ro m t h e c o m p u te riz e d
re c o r d u p o n n o tic e o f re c o v e ry b y a r e p o r t
in g in s titu tio n . F u r th e r m o r e , t h e s y s te m
s h o u ld h a v e t h e c a p a c ity t o g e n e r a te h a r d
c o p y c o n f irm a tio n s , a n d t h e d e s ig n e e s h o u ld
h a v e p ro c e d u re s f o r t h e p e rio d ic tr a n s m i tt a l
o f s u c h c o n f irm a tio n s t o t h e r e p o r tin g e n t i
tie s .
T h e s y s te m s h o u ld h a v e t h e f le x ib ility to
p r o m p tly r e s p o n d to In q u irie s in a v a r ie ty o f
w ay s, in c lu d in g b y te le p h o n e , m a ll, a n d
te le x , a s w ell a s o t h e r e le c tro n ic m e a n s . T h e
s y s te m s h o u ld in itia lly v e rify t h a t t h e
p e r s o n m a k in g in q u ir y is a n a u th o r iz e d s u b
s c rib e r. T h e s y s te m s h o u ld b e a b le to p r o
v id e a n a c c u r a te re s p o n s e t o t h e in q u iry
p r o m p tly a n d t o p ro v id e t h e in q u ir e r w ith a
h a r d c o p y c o n f irm a tio n . I n a d d itio n , i t
s h o u ld h a v e t h e c a p a c ity t o s to r e a re c o rd
o f in q u irie s . S u c h r e c o rd s s h o u ld b e a b le t o
b e r e tr ie v e d b y t h e n a m e o f t h e s u b s c r ib e r
a s w ell a s t h e n a m e o f t h e p a r tic u la r s e c u ri
ty .
CO ST AND FEE S
A ll p ro p o s e d s y s te m s s h o u ld In c lu d e e s ti
m a te s o f t h e c o s t o f I m p le m e n ta tio n , t h e
a m o u n t o f tim e n e c e s s a ry t o i n itia te t h e
s y s te m , t h e c o s t o f o p e r a tio n , t h e m e th o d o f
b illin g su b s c rib e rs , a n d a llo c a tio n o f t h e
c o s ts o f t h e s y s te m a m o n g s u b s c rib e rs . P r o
sp e c tiv e d e s ig n e e s s h o u ld In c lu d e in t h e i r
s u b m is sio n s a d e ta ile d s c h e d u le f o r t h e
e q u ita b le a llo c a tio n o f t h e c o s ts o f t h e p ro
g ra m . A ll f e e s c h e d u le s w ill b e s u b je c t t o
t h e a p p ro v a l o f t h e C o m m issio n a n d t h e
d e s ig n e e w ill b e re s p o n s ib le f o r t h e c o lle c
t i o n o f fe e s.
SY S T E M CA PA C ITY
T h e s y s te m s h o u ld b e c a p a b le o f h a n d lin g
f lu c tu a tio n s in v o lu m e w ith o u t lo ss o f e f fi
c ie n c y . W h ile i t is c o n te m p la te d t h a t t h e
d e s ig n e e w ill p ro c e ss a p p r o x im a te ly 10,000
ite m s p e r d a y , p ro p o s e d s y s te m s s h o u ld b e
s u f f ic ie n tly fle x ib le t o o p e r a te s m o o th ly a t
v o lu m e le v e ls o f a t le a s t 15,000 Ite m s p e r
day.
R E C O R D K EEPIN G
T h e d a t a b a s e w ill b e t h e p r o p e r ty o f t h e
C o m m issio n , a n d t h e o r ig in a l ta p e s , a s w ell
a s a h a rd -c o p y o f t h e in f o rm a tio n c o n ta in e d
t h e r e in , m u s t b e tr a n s m it t e d to t h e C o m
m iss io n a t t h e te r m in a tio n o f t h e p e rio d o f
d e s ig n a tio n o r u p o n re q u e s t. T h e C o m m is
s io n w ill p e rio d ic a lly r e q u ire r e p o r ts b y t h e
s e le c te d d e s ig n e e d e ta ilin g t h e In fo r m a tio n
c o m p ile d in t h e s y s te m a n d t h e o p e r a tio n o f
t h e d e s ig n e e ’s p la n . I n a d d itio n , t h e d e s ig
n e e s h a ll k e e p a c u r r e n t a n d t r u e re c o rd ,
a v a ila b le f o r in s p e c tio n b y t h e C o m m issio n ,
w ith r e s p e c t to e a c h r e p o r t, in q u iry , c o n f ir
m a tio n , c o r re c tio n o r o t h e r in f o r m a tio n r e
c e iv e d p u r s u a n t t o t h i s d e s ig n a tio n , t h e
tim e o f a n d m e a n s b y w h ic h s u c h r e p o r t, in
q u ir y o r o t h e r in f o r m a tio n w a s re c e iv e d , t h e
tim e o f re s p o n s e , t h e m e a n s b y w h ic h a r e
s p o n s e w as g iv en , a n d t h e n a t u r e o f t h e r e
s p o n s e . T h e d e s ig n e e s h a ll a ls o m a k e a v a ila
b le f o r t h e C o m m issio n ’s in s p e c tio n a ll r e c
o r d s a n d a c c o u n ts o f a m o u n ts b ille d t o r e
p o r tin g in s titu tio n s a n d a c c o u n t f o r a ll e x
p e n s e s I n c u rre d b y t h e d e s ig n e e . S u c h r e c
o r d s f o r a n y c a le n d a r y e a r s h a ll b e k e p t f o r
t h r e e y e a r s a f t e r t h e e n d o f t h e te r m o f d e s
ig n a tio n .
O T H E R C O N SID E R A T IO N S
I n m a k in g a d e s ig n a tio n , t h e C o m m issio n
w ill c o n s id e r t h e fo llo w in g f a c to rs , a m o n g
o th e r s : T h e c o s t o f I m p le m e n tin g t h e
s y s te m , t h e a m o u n t o f tim e n e c e s s a ry t o In i
t i a t e t h e s y s te m , t h e c o s ts o f o p e r a tio n , t h e
c o s ts o f c o m p lia n c e t o r e p o r tin g i n s t i t u
tio n s , t h e c o m p a tib ility o f t h e s y s te m w ith
e x is tin g s e c u ritie s in f o rm a tio n s y s te m s, t h e
a b ility o f t h e s y s te m t o re s p o n d to f lu c tu
a tio n s in r e p o r tin g a n d in q u iry v o lu m e in a n
e f f ic ie n t m a n n e r , t h e e x p e rie n c e o f t h e d e s
ig n e e In m a n a g in g s im ila r p ro g ra m s , a n d
t h e m e th o d o f a llo c a tin g c o s ts a n d b illin g
s u b s c rib e rs .
[ F R D oc. 78-21808 F ile d 8 -4 -7 8 ; 8:45 a m ]
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