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DTC Rule Change SR-DTC 2016-003: Deposit Chills and Global Locks

The Depository Trust Company (DTC) is proposing a new Rule 33 which would establish new circumstances under which the DTC would be allowed to release a Deposit Chill or Global Lock, in addition to the opportunity that Issuers have to challenge the restriction. The DTC is a critical component for the National Clearance and Settlement system; and having DTC eligible securities allows your securities to be traded on a larger market, allowing you to raise more capital.

Previous Regulations

Previously, the DTC would impose a Deposit Chill on any suspicious large deposits. After a Deposit Chill was imposed, the Issuer was required to obtain legal counsel and then submit a satisfactory legal opinion. Deposit Chills sometimes were in effect for years because Issuers were unresponsive or unable submit the legal opinion.

In addition, the DTC would impose a Global Lock on any security when a government or regulatory authority violated Section 5 of the Securities Act. These locks could only be released when the action was withdrawn, dismissed, or resolved; which can sometimes take several years.

Proposed Regulations

Deposit Chills and Global Locks will now be imposed if there are imminent consequences either to the DTC or its participants. If FINRA or the SEC suspends trading for a security, the DTC will automatically impose a Global Lock. In addition, the DTC will automatically impose a Global Lock if ordered to do so by a court of law. The combination of suspended trading and global locks could stop bad actors from still obtaining the proceeds of fraudulent activity after the trade has been suspended. However, if the DTC determines that there is not reasonable cause for a suspension in trade by either the SEC or FINRA they will not impose a Global Lock.

Because restrictions will now only be imposed if there is an imminent threat, the DTC does not anticipate imposing restrictions regularly. Although it is not possible to determine every situation that may arise, restrictions will be imposed less frequently.

Release of Deposit Chills and Global Locks

Pursuant to the new regulations, if the DTC determines they have made a clerical mistake in imposing a restriction, it will be immediately removed. In addition, if FINRA or the SEC lifts their trading restrictions, the Global Lock will also be lifted.

Issuers now have the opportunity to challenge a restriction within 20 business days after receiving a restriction notice. The challenge will be reviewed by a DTC officer who was not involved in imposing the restriction, and the restriction could potentially be lifted without legal counsel.

The DTC welcomes any comments concerning these proposed regulations.

Published: December 29, 2016

Author: Shelby Wayment