SEC Division of Investment Management staff letter: ASX Settlement & Transfer Corporation

... .
AUG I 3 199 .
Ref. No. 96-317-CC

ASX Settlement and

Transfer Corporation

RESPONSE OF THE OFFICE OF CHIEF COUNSEL Pty Ltd

DIVISION OF INVESTMNT MAAGEMENT File No. 132-3

By letters dated May 1 and June 17, 1996, you seek assurance

that the staff would not recommend enforcement action t9 the

Commission under Section 17 (f) of the Investment Company' Act of

1940 (the "Investment Company Act") or Rule 1 7f - 5 thereunder, if a u.S. registered investment company (a "u.S. fund") holds

securities of non-Australian issuers ("foreign issuers") that are

, and

electronically cleared and settled through the Australian

Clearing House Electronic Subregister System (" CHESS"), by

holding CHESS Units of Foreign Securities, as described in your

quoted on the Australian Stock Exchange (the "ASX")

letter.
Background
You state that CHESS performs the electronic clearance and

settlement of transactions in securities issued by Australian

entities that are quoted on the ASX.1 CHESS acts as agent on

behalf of individual issuers, and operates an electronic

subregister, in a manner similar to that of a transfer agent,

that is recognized at law as an integral part of each issuer's

principal register of securi tyholders .2 You also state that

CHESS does not operate as a depository and does not have an

associated depository.
In ASX Settlement, you stated that CHESS does not take

physical possession of, or acquire any interest in, securities,

and does not have any custodial role in relation to securities

held on the CHESS subregister. Rather, participants in CHESS

directly control the securities holdings in CHESS, and such

securities holdings are registered in the name of the

participant, a wholly- owned subsidiary of a participant, or, in

some instances, a sponsored holder.

ASX Settlement and Transfer Corporation Pty Ltd

("ASTC"), a wholly-owned subsidiary of the ASX,

operates CHESS. You have represented that CHESS is subj ect to the regulatory oversight of the Australian Securities Commission. See ASX Settlement and Transfer

Corporation Pty Ltd (pub. avail. Apr. 19, 1994) ( "ASX

Settlement") .
2 The securities recorded on CHESS's subregister are

uncertificated. Although CHESS-approved securities may

be held in certificated or uncertificated form,

securities held in certificated form are required to be

converted to uncertificated form before they may be

delivered in settlement of trades on the ASX.

You state that participants in CHESS include brokers and

certain institutional investors, including bank custodians and

trustees. U. S. funds do not participate directly in CHESS, but

gain access to CHESS through bank custodians participating in

CHESS. You also state that aU. S. fund's participation in CHESS

through its bank custodian does not affect the contractual

relationship between the fund and its custodian.
Proposal
ASTC now wishes to expand CHESS so that it can be used for

the electronic clearing and settlement of transactions in

securities of foreign issuers that are quoted on the ASX. You

believe, however, that the jurisdictions in which many foreign

issuers are organized may not recognize CHESS transfers of those

issuers' securities. To resolve this problem, you propose to

establish CHESS Depositary Nominees Pty Ltd ("CDN"), a wholly-

owned subsidiary of ASTC, which would hold legal title to the

securities of foreign issuers that are electronically cleared and

settled on CHESS. CDN, in turn, would issue to investors CHESS

Units of Foreign Securities ("CUFS") which represent beneficial

interests in the underlying securities of the foreign issuers.

As with the current CHESS system, participants in CHESS will

control the beneficial interest in securities of the relevant foreign issuers. Under your proposal, the ASX would quote and trade the

securities of foreign issuers, but not the related CUFS. CUFS

would be used to effect the broker-to-broker settlement of

trading in these securities. 3 The buyer would have the option of

either leaving the investment in the name of CDN in the form of

CUFS, or converting the CUFS into share certificates, allowing

the investor to hold direct legal title in its own right.

You represent that the principal difference between holding

CUFS and holding the underlying securities is that the holder of

CUFS would hold a beneficial interest in the underlying

securities, while CDN would hold legal title in trust for the

beneficial owner. You represent that CUFS holders will have the

same rights and benefits as if they directly held the underlying

securi ties. 4

3 You state that a broker purchasing a non-Australian

security would accept delivery of CUFS in satisfaction

of the seller's obligation to deliver the underlying security.
4 You state that the one exception is with respect to

jurisdictions in which shareholder voting may occur by a "show of hands." Under such a system, unless a poll (continued. . . )

You represent that CDN does not maintain a register of CUFS;

rather, the Rules obligate the foreign issuer or its agent to

maintain a register of CUFS with respect to its shares. These

Rules require the foreign issuer or its agent to ensure that the

numer of CUFS on the CUFS register maintained by the foreign issuer always reconciles with the numer of shares registered in the name of CDN on the share register of the foreign issuer. You

represent that CDN performs no function other than holding legal

title to securities, and certain actions relating to meetings of

shareholders. You maintain that CDN is a nominee, in effect, for

the beneficial holder, and the mere fact of holding legal title

does not make CDN a custodian of the CUFS or the underlying

securities. You assert that because CDN does not serve a

custodial function, it need not qualify as an "eligible foreign

custodian," or otherwise comply with Rule 17f - 5, in order for

U. S. management investment companies to hold CUFS.

Analysis
Section 17 (f) of the Investment Company Act governs

custodial arrangements for U. S. investment company assets. Rule 17f - 5 thereunder permits aU. S. fund to maintain its foreign securities in the custody of an "eligible foreign custodian."

Rule 17f-5 (c) (2) (iii) defines the term "eligible foreign

custodian" to include a "securities depository or clearing

agency, incorporated or organized under the laws of a country

other than the United States, which operates the central system

for handling of securities or equivalent book-entries in that

country. "
In ASX Settlement, the staff stated that it would not

recommend enforcement action to the Commission under Section

17(f) or Rule 17f-5 thereunder if a U.S. fund maintained assets

with an eligible foreign custodian that participates in CHESS,

and the fund's assets were recorded on CHESS's electronic

subregister. The staff noted in that letter that a system that

is not a depository (and that does not have an associated

depository), and in which securities do not come to rest, is not

a central system for the handling of securities within the

4 ( . . . continued) is demanded, shareholders may only vote in person. You

state that it is unlikely that a CUFS holder would be

entitled to attend shareholders' meetings, and thus may

be precluded from voting in these situations. You

represent, however, that the Securities Clearing House

Business Rules (the "Rules"), which govern the

operation of CHESS, give CUFS holders the right to

convert their holdings to certificated shareholdings at

any time, and that they will normally be able to

exercise that right prior to the voting record date.

meaning of Rule 17f-5(c) (2) (iii).5 In effect, the staff

determined that an entity that does not serve a custodial

function should neither be entitled to rely on nor be governed by

Rule 17f-5.
On the basis of the facts and representations in your

letter, particularly your representation that CDN does hot serve

a custodial function, we would not recommend that the Commission

commence enforcement action under Section 17 (f) of the Investment

Company Act, or Rule 17f - 5 thereunder, if aU. S. fund maintains

CUFS with an eligible foreign custodian that participates in

CHESS, without treating CDN as a custodian subject to Rule 17f-5.

~ !RUbenstein

Senior Counsel

5 See also Reserve Bank of New Zealand (pub. avail. May 24, 1993). Although subparagraph (c) (2) (iii) defines "eligible foreign custodian" to include foreign

clearing agencies as well as foreign securities

depositories, the administrative history of Rule 17f-5

indicates that the subparagraph refers to both types of

entities simply because a foreign securities depository

may be denominated a "clearing agency" in certain

countries. Investment Company Act Rel. No. 13724 at n.

31 (Jan. 17, 1984) (reproposing Rule 17f-5).

Consequently, the staff focuses on the depository

function of the foreign entities seeking no-action relief under Rule 17f-5 (c) (2) (iii).

(L\bl~.~:j :fij
-r"/' .
~I~~I'

~I,.I~

AUSlRALIAN STOCK EXCHANGE
LIMITD
ACN 008 624 691
PO Box H227 Austraia Squae NSW 2000
Level 7, 20 Bond Street Sydney NSW 200
SETEME - Telephone (02) 227 00 Facsimile (02) 2514071 Direct Line: (02) 227 0379 âf .~ _. .... . .__H. . ~ r - . ,,""..i.~""'~"" -. \ .A 1 May 1996 BE . , . vi . .." Mr Jack Murphy at.- R fT.-t-:S Associate Director, Division of Investment Management PtLJC 01"i:l:
450 Fifth Street NW

United States Securities and Exchange Commission AVAIBli.lT~ WASHINGTON DC 20549

Dear Mr Murphy,
INVESTMENT COMPANY ACT OF 1940 . SECTION 17(f) . CHESS UNITS OF FOREIGN SECURITIES ("CUFS") ASX Settlement and Transfer Corporation Pty Ltd C'ASTC"), a wholly owned subsidiary of Australian Stock Exchange Limited, is responsible, through the Clearing House Electronic Subregister System ("CHESS"), for the electronic system of clearance and settlement of transactions in domestic securities quoted on the Australian Stock Exchange ("ASX"), and for the transfer of ownership pursuant to such transactions. Owing to CHESS and other ASX settlement reforms, the Australian equities settlement system is now regarded by external assessors as one of the world's most reliable and effcient systems. ASTC now wishes to expand CHESS, so it can be used for the clearing and settlement of Australian transactions in non-Australian securities. For this purpose, legal title to the foreign securities wil be vested in an Australian entity, but the full beneficial ownership will belong to the ! . investor. A wholly-owned subsidiary of ASTC and ASX, called CHESS Depositary Nominees Pty Ltd ("CDN") wil offer to hold legal title to the securities. Investors' interests will be known as "CHESS Units of Foreign Securities" ("CUFS"). The introduction of CUFS as an enhancement of CHESS has broad industry support and the support and formal approval of the Federal Attorney General and the Australian Securities Commission ("ASC"), the government agency primarily responsible for regulating the securities industr¡. To remove any possible perception that US management investment companies may be unable to hold securities in the form of CUFS, ASTC seeks an assurance from the staff of, the Commission that in the opinion of the staff the holding by a US management investment company of securities (including US securities) in the form of CUFS, where legal title to the sacurities is vested in CON, would not violate Section 17(f) of the Investment Company Act of 1940 (15 U.S.C. 80a), provided that the arrangements between the US company and its Australian custodian nominee comply with the requirements of the Act. It is the b~sis of our submission that CON is not a true depositary within the meaning of

~ i subparagraph (c)(2)(ii) of Rule 17f-5 in that it does not serve a custodial function as typically characterised within the terms of the Rule. We therefore submit that the introduction of CUFS as ~ i~ . rc:

~- an enhancement of CHESS should not alter the original view expressed by the staff of the Commission in response to ASTC's request in relation to CHESS in 1994. It appears to us, after a useful meeting with you in Sydney on 2 April 1996, that a "no interest" letter in such a form is more appropriate to the circumstances than a "no-action" letter which would express the staff's opinion on CON's status under Rule 17f-S(c)(2)(ii) or (iv). The following information is provided in support of our request. SEC Staff's Previous Consideration of CHESS In April 1994 the staff of the Commission responded to a request from ASTO for an assurance that it would not recommend enforcement action under Section 17(f) of the Investment Company Act of 1940 should US management investment companies utilse' CHESS services. At that time, the Commission stated that CHESS did not fall within the meaning of Rule 17(f)-5(c)(2)(ii) as it was not a depositary and did not have an associated depositary and therefore a "no action" letter was not in fact necessary. The relevant conditions attached to the response were:
. CHESS would not operate as a depositary and would not have an associated depositary; . CHESS would not acquire any interest in securities or change the nature of a security-holder's interest in securities. Holdings were to be registered in the name of a Participant, a wholly owned subsidiary of a Participant or a sponsored Holder. Holdings would not be registered in the name of CHESS; . an investment company's participation in CHESS through a custodian would not affect the

contractual relationship between the company and its custodian.
We enclose copies of correspondence which we have previously forwarded to you in relation to CHESS. We ask that this correspondence form a part of our submission (refer Appendix A). At that time, the staff of the Commission took the position in relation to CHESS that, "a system that is not a depositary (and does not have an associated depositary) and in which securities do not come to rest is not a central system for'the handling of securities within the meaning of subparagraph (c)(2)(ii) of Rule 17f-S" 1994, p 2) (letter from Julia Ulstrup to Christine Jones, 19 April

It was also stated,
"an entity that does not serve a custodial function should neither be entitled to rely on nor be governed by Rule 17f-5. You (ASTC) represent that CHESS wil not have any custodial role in relation to the securities recorded on the CHESS subregister." (ibid, P 2) It was upon this basis that the staff of the Commission took the view that an assurance in relation to enforcement action would not be necessary. CHESS a~~d Paperless Transfer of Securities CHESS serves as the electronic system for the transfer of all Australian securities traded on the Australian stock market through its automated trading system ("SEATS"). With the introduction of Phase II (Delivery versus Payment - the irrevocable exchange of good title to securities for good SIW\molL-FRAPP3

6- valùe of cleared funds) on April 9, 1996, CHESS has begun to settle all trades effected on the ASX through SEATS. The principal difference between CHESS and typical central depositary systems is that CHESS has implemented a name on register system which faciltates electronic transfer of securities. Each listed Australian company maintains a subregister within CHESS for each class of its quoted securities. As soon as settlement is effected (on a net basis), the transfer of legal ownership of the relevant securities occurs electronically on the subregister. CHESS does not acquire any interest in Australian securities, nor change the nature of security holder's interest in the securities. Under CHESS legal title, not mere beneficial ownership of Australian securities, passes from the transferor to the transferee. The securities of Australian companies listed on ASX have been progressively transferred to CH ESS since- its introduction in September 1994. All Australian companies listed on the ASX are , now on CHESS and negotiations are nearing conclusion with the regulatory authorities of New Zealand and Papua New Guinea in order that companies incorporated in those jurisdictions may utilse CHESS. At the time of writing, securities are held on the CHESS Subregister by over .150,000 lndividuai shareholders in over 904,000 "holdings". The total value of these securities is AUD$183 billion; which is 54.52% of the market capitalisation of domestic equities in Australia. ASX is now independently rated by GCSC as second only to the US as the most efficient market for settlement in the world. The establishment of CHESS as a central clearing facility has provided the transfer of securities in dematerialised form and an electronic subregister system that wil enable ASX to move from the present liT + 5" to a liT + 3" fixed settlement period in the near future. Foreign Issuers and CHi:ss The securities of a company incorporated outside Australia cannot be approved for CHESS unless the legal framework, including the electronic subregister, is recognised by the relevant foreign law. Legal recognition of CHESS wil be achieved in New Zealand and Papua New Guinea. This is not feasible, at least in the short term, in the case of other countries including the United Kingdom and the United States. If, for example, a UK issuer wishes to have its shares quoted in Australia, UK law wil govern the validity of the transfer of the shares. While UK law may make some aspects of the transfer depend on the law of the jurisdiction where the relevant branch register is located, our legal advice is that CHESS transfers of shares of a UK company would not be fully recognised in the United Kingdom even if those shares are registered on an Australian branch register of the UK company. Approximately 45 foreign issuers are listed on ASX, with 65 securities of those issuers being quoted on the ASX. As mentioned previously, it is only the laws of PNG and New Zealand that wil recognise
CHESS in the short term. This means that, in the absence of a facilty such as CUFS, settlement of ASX trades in foreign securities wil continue to rely on the traditional paper based system. This constitutes a reversion to an inefficient system with the inherent risks, expenses and delays. Paper certificates must be marked and split, and paper transfers and certificates must be physically delivered to buying brokers and then to company registries, frequently interstate. By way of example, we attach graphs (Appendices B1 & B2) representing trade and failed settlement statistics in respect of a major company formerly listed on the ASX. This company had approximately 29,000 shareholders at the time it was removed from the Official List of the Australian Stock Exchange in late 1995 after acquisition under a Scheme of Arrangement by its British par~nt company under which shareholders received shares in the British parent and those shares were admitted to quotation by ASX. Upon implementation of the merger, it became necessary to revert to a paper-based settlement regime for trades in shares of the British parent effected on the ASX's market. The incidence of S\W\mo\L-FORAPP3

failèd settlements increased markedly as a result, from under 1 % to 18%. The stock in the British parent company has suffered an associated drop in market liquidity at the same time. CHESS Units of Foreign Securities ("CUFs") To enable transactions in non-Australian securities executed on ASX to be electronically settled and registered on almost the same basis as securities issued by' Australian incorporated companies, with the resultant benefis, ASTC has developed CUFS as an enhancement to the existing CHESS system. - ASX wil quote and trade foreign securities which cannot, under the law of the. furisdiction in which the issuer has its primary listing, be transferred within CHESS. CUFS wil be used to effect -broker-broker settlement of trading in the foreign securities. At this stage it is not intended that CUFS wil be quoted or traded in their own right. However, it 'is intended that the underlying security be quoted and that a buying broker of the underlying security wil accept delivery of CUFS in satisfaction of the seller's obligation to deliver the underlying security. The buyer wil have the option of either leaving the investment in the form of CUFS, or requiring registration in the company's Australian branch (paper) register. The principal difference between holding CUFS and holding shares is that the holder of CUFS wil hold beneficial title to the equivalent number of shares in the relevant foreign company instead of legal title. The legal interest wil be held by CON pursuant to arrangements made between the issuer, its third part provider, ASX and ASTC. Securities in the name of CON wil be held on trust for the benefit of the CUFS holder. The CUFS Rules which are a part of the Securities Clearing later) explicitly state this. CON's charter wil prohibit it from performing any function other than holding as trustee (see below, Powers and Functions of CON). House Business Rules (which are covered in more detail

Using CUFS, a seller transfers beneficial title of shares to buyers instead of legal title. The investor may choose to either leave a holding in the name of CON or convert the CUFS into shares in order that the investor may hold legal title in its own right. The CUFS Rules explain how a conversion from CUFS to shares and vice versa,. is to be effected. To hold foreign securities in the form of CUFS, shareholders must be sponsored in the same way as shareholders in CHESS. This entails signing a "sponsorship agreement" with a CHESS "participant", generally an ASX broker or a non-broker participant such as a custodian or trustee company. A sponsorship agreement authorises the sponsor to deal with the holder's shares on his/her behalf, subject to express conditions which strictly limit what the sponsor may do. The Securities .clearing House ("SCH") Business Rules which govern CON and the foreign issuer contain provisions to ensure that CUFS holders receive all of the economic benefits which they would normally receive, had they been holding legal title to shares. Although legal ownership of the underlying shares will vest in CON, CON is to be used in a legally "transparentl manner. In substance, the obligations which an issuer traditionally owes to shareholders, it wil also owe in similar manner to CUFS holders. The way in which this has been achieved is that the CUFS Business Rules oblige CON (or any other depositary nominee approved by SCH) to grant a power of attorney in favour of the issuer, so that the issuer performs all the obligations which CON, by virtl,e of the Rules, owes to CUFS holders. In addition, there is also an agreement between CON and the issuer which describes in detail the agency role which the issuer performs on behalf of CON. -, An essential part of the transparency created as a result of the power of attorney is that it ensures that there is no discrimination between CUFS holders on the CHESS Subregister and shareholders on the certificated register. A foreign issuer's obligations in relation to shareholders

J · (e.g.in relation to corporate actions) are exactly the same in content as its obligations to CUFS holders. Under the CUFS system, the foreign issuer has the obligation to facilitate conversions from CUFS to certificated or from certificated to CUFS format by modifying the register, issuing modified certificates and signing transfer forms. It is in this way that there is a direct flow of all relevant corporate actions and information from the issuer to the CUFS holder, as if the CUFS holder held the underlying security. The one exception is- in the case of voting rights. This is discussed below. ,The underlying securities themselves are lodged with the relevant Foreign Issue-r'for safekeeping, as required by the provisions of SCH Business Rule 3A2.1 (e). It wil be seen that these special arrangements are markedly different from the arrangements

between an investor and a depositary or custodian nominee. No deposit agreement is involved with CUFS in the way that a deposit agreement is normally involved with depositary receipts. Nor do CUFS require a custodian agreement of the kind that a foreign investor would make with a local custodian nominee, though it is assumed that foreign investors wil continue to use custodian nominees just as they do now.This is because the obligations which would normally be outlined in the deposit agreement are contained in the CUFS Business Rules. These Rules are a part of the SCH Rules which by statute have the effect of a contract under seaL. As CON's holding of securities of the Issuer would make it subject to the Corporations Law, the Australian Securities Commission wil shortly issue a declaration which specifically exempts CON from the application of certain parts of the Corporations Law. A copy of the draft ASC declaration is enclosed for your perusal (Appendix C1). As you wil see from the declaration, CON wil be exempt from the application of Division 2 and Division 3 of Part 7.12 of the Corporations Law. Division 2 relates to the issue of securities and the requirement to issue a prospectus etc and Division 3 relates to restrictions on allotment of shares. We also attach a copy of the ASC declaration in relation to CUFS (Appendix C2) which essentially provides that they are "marketable securities" undér the relevant provisions of the Corporations Law. Voting Rights As in the case of depositary receipts, the voting rights available to a CUFS holder are not quite as extensive as for the holder of the underlying security. For example, the CUFS holder cannot stipulate who is to be the proxy. Nor can a CUFS holder participate in a "show of hands" vote. Under the SCH Business Rules and arrangements between the foreign issuer and ASTC, the foreign issuer wil be obliged to communicate with CUFS holders directly as if they were security holders on the foreign issuer's register. Therefore, where the securities are shares, each CUFS holder wil be entitled to receive a notice of a shareholders' meeting as if each of them was a shareholder. The Business Rules wil require, if a shareholder is entitled under the law of the foreign issuer to vote by proxy at the meeting, that the foreign issuer must give the CUFS holder the opportunity to give a direction to CON in the same circumstances. These directions wil be lodged with the foreign issuer's Australian share registry, which wil count them.and then instruct CON to lodge a proxy vote as shareholder in accordance with the respective directions of the CUFS holders. In this way proxy votes of CUFS holders wil be recorded in much the same way as the votes of shareholders. The Business Rules impose an obligation on CON to lodge proxy votes in this manner, and do not allow it to vote other than in accordance with the directions of CUFS holóers. In some jÓrisdictions voting at a meeting of shareholders is show of hands,
unless a poll is demanded. If a poll is demanded, proxy votes are counted but if a poll is not demanded, only the shareholders who are personally present can vote. Where the foreign issuer is from a jurisdiction which has such rules, it is unlikely that a CUFS holder wil be entitled to attend the shareholders' S\W\rno\L-FORAPP3

mooting and vote on a show of hands. However, the Business Rules give CUFS holders the right v- to convert their holdings to certificated shareholdings at any time, and they wil be normally able to exercise that right prior to the foreign issuer's record date for voting purposes. Powers & Functions of CON The Memorandum and Articles (the charter) of CON are currently being reviewed so as to restrict the powers of CON to acting solely as trustee for and on behalf of CUFS holders. CON wil not be able to engage in securities trading, securities lending, underwriting, giving loans to industrial or commercial enterprises or any other commercial activity. SCH Business Rules and CUFs The SCH Business Rules (Of which the CUFS Rules are a part) are by virtue of the Corporations Law (section 779F) a contract under seal between:
SCH" and each issuer;
SCH and each SCH participant; each issuer and each SCH participant; and between an SCH participant and each other SCH participant. By virtue of this section each of the persons mentioned above agrees to observe and perform the provisions of the SCH Business Rules as in force for the time being. The obligations of CHESS users to comply with the SCH Business Rules are reinforced in other ways. Thus:

brokers are obliged to comply by virtue of ASX Articles of Association and Business Rules; non broker participants are obliged to comply because of the contract created by acceptance of the application for non broker participant status. This acceptance contains a covenant wherein the non broker participant agrees to comply with the SCH Business Rules; and issuers are obliged to comply by virtue of ASX Listing Rule 3D(2A). A more detailed description of the Rules and the issues generally relating to CUFS is to be found in the document titled "AUssIE CUFs . A PROPOSAL TO SETTLE TRANSACTIONS IN FOREIGN SECURITIES THROUGH CHESs." A copy of this document is included for your information (Appendix D). As you wil see, the document refers to the Rules in the future tense. The Rules have in fact been drafted and are now finalised, subject to minor modification by and approval of the Australian Competition and Consumer Commission ("ACCC"). As no significant objections have been raised by the ACCC, we believe their approval wil follow as a matter of course. The SCH Business Rule amendments to accommodate CUFS are attached fár your information (Appendix E). These Rules, other than some minor amendments, have been approved by both the Australian Securities Commission and the Board of ASX Settlement and Transfer Corporation. Protection of CUFs Holdings ASTC is a 'Wholly owned subsidiary of ASX, CON being a wholly owned subsidiary of ASTC. The ASX Group Insurance policy covers all ASX subsidiary companies, which includes CON, up to an indemnity limit of AUD$1 0 milion in the aggregate. The policy covers the risks of staff dishonesty SIWlmoIL-FORAPP3

r.l
7 ~~~~~ .~
.. or Infidelity, theft of money and securities, forged cheques and securities and electronic and computer fraud. ASX is a body corporate owned by its broker members. It was incorporated by an act of the Commonwealth Parliament (Australian Stock Exchange and National Guarantee Fund Act 1987) which amalgamated the existing six state exchanges. ASX gains its authority to operate the Stock Exchange in Australia under the Corporations Law
1989. It is specified in this Act that a securities exchange can be established and operated in
Australia only with the approval of the Commonwealth Attorney General.
As subsidiaries of ASX, ASTC and CON are subject at all times to the supervišion and regulation of the Australian Securities Commission and the Commonwealth Attorney-General. ASX's powers and areas of operation are set out in its Business and Listing Rules which cannot be altered

without the approval of both the ASC and the Attorney General. approval. The SCH Business Rules and any associated activities of SCH and CON are subject to the same supervision and regulation as applies to ASX. The National Guarantee Fund provisions of the Corporations Law cover the concept of CUFS as a "marketable security". A holder of CUFS sponsored by a Broker member of ASX is fully covered by the National Guarantee Fund from losses arising from any unauthorised transfer of CUFS by a Broker member. The risk of CON becoming insolvent is low and therefore the associated risk of loss by a CUFS holder is low. CON wil merely operate as a receptacle of bare legal title and wil not engage in any other activities that may result in financial liability. Concluding Submission As a matter of substance, it is clear that the arrangements for CUFS provide a level of investor protection equivalent to the investor protection for CHESS itself. The only significant practical difference between a holding of CUFS and a holding of the underlying shares, and a very limited one at that, is that if the law of the home jurisdiction of the foreign issuer allows a matter to be determined at a shareholders' meeting by a show of hands, and the CUFS holder wishes to attend the meeting and vote in that manner, it wil be necessary for the CUFS holder to convert the holding into shares in time to do so. Rule 17f-5 is designed to deal with foreign custody arrangements made by US management investment companies. It is inaccurate to describe the CUFS system as a custodian system. CUFS is mere repository of legal title, and does not provide any custodian services. All investor communications, and all distributions of dividends and other corporate benefis, are handled by the foreign issuer through its Australian company registry. These arrangements are set out clearly in the Business Rules which have the force of law and constitute a statutory contract binding the parties, and are reinforced by individual contracts to which each foreign issuer is a
part. The arrangements for CUFS have been carefully reviewed by the Australian Securities
Commission and the Attorney-General's Department, as well as the Australian Competition and Consumer Commission as regards competition issues, and have been approved. These arrangements will overcome a significant inefficiency which needs to be addressed. US companies typically hold securities acquired in Australia through Australian custodian nominees. If the investor' is registered under the 1940 Act, it wil be expected to make arrangements with a custodian nominee which conforms to Rule 17f-5. The policy concerns which underlie the rule (and which are reflected in Release 1 C-21259) are addressed by the investor-clÍstodian relationship. These protections are not dislodged by CUFS. We submit, therefore, that the Commission should respond to our request in a manner which best ensures that US investment management companies are not subject to any impediments in SIW\moIL-FORAPP3

• . ~
  investing in non-Australian securities in Australia through the use of CUFS. It appears to us that this objective would be achieved by the Commission's staff expressing the view, following the view expressed in April 1994, that a US investment management company which holds CUFS wil not thereby violate Section 17(f). I look forward to your early response. If you have any queries please do not hesitate to contact me. Yours sincerely, ca::o~~ ~~ Corporate Solicitor. ASX Settlement and Transfer Corporation cc Mr Michael 0 Mann

Associate Director (International Affairs)
Division of Enforcement i.
S\WlCmo\L-FORAPP3

12: 37 ASX CHESS PROJECT 2514071 NO. 835 P.2/3 'I.~' ~I,d~ ASX SETTL AND TRASFER CORPORATION

PlY LTD

AOI oo 504 532

PO Box H227 Jlustral;i Square NSW 2000

Leel 7. ~O Bond SlTeet Sydney NSW 20

Tc!ephone (02) 227 00 Facsimile (02) 251 4071

Direc Une: (02) 227 ona
17 June 1996
Mr John V Q'Hanlon
Assistant Chief Counsel
United States Securities and Exchange Commission Washington DC 20549 Via Faos;mlle: 0011 1 202 942 9659 Dear Mr O'Hanlon, Thank you for your timely response to our letter. In relation to the queries raised by you on
page 2 of your letter we respond as follows:

1. We assume that your reference to the maintaining of custody of secunties by foreign
   issuers is a reference to the immobilsation of securities in a custodian who then issues depositary receipts on behalf of the foreign issuer. If this is the nature of your query then we advise that foreign issuers who -are listed on ASX are able to quote their secunties directly on ASX. They therefore do not require a custodian to hold their secunties in order for the issue of depositary recipts which are then quoted. Where a foreign issuer wishes to participate in CHESS, the securities which are quoted on ASX wil be held by CHESS Depositar Nominees and CHESS Depositary Nominees will issue CUFS. In addition, the securities to which the CUFS are subject, wil continue to be quoted notwithstanding the fact that the delivery obligations of the seller of those securities wil be discharged upon the delivery of CU FS instead of the underlying security.
2. The 13usiness Rules which regulate the issue and transfer of CUFS impose an
   obligation upon the foreign issuer to maintain a register of CU FS issued over its shares, on behalf of CHESS Depositary Nominees. CHESS Depositary Nominees performs no function other than to hold secunties and to perform certain actions in relation to corporate actions and meetings of shareholders. In addition Business Rule 3A 5.3 ( a full copy of the Business Rules was enclosed with our letter of 1 May i 996) imposes an obligation on the foreign issuer to ensure that the number of CUFS on the CUFS register always reconciles with the number of shares registered in the name of CHESS Depositary Nominees on the shar'é register of the foreign issuer. As the foreign issuer is responsible for operating the share register as S\IIIL.-Bsg:ia

, _ l3',!C, 12: 37 RSX CHESS PROJECT 2514071 NO . 835 P_ 3/3 well as the CUFS register (on behalf of CHESS Depositar Nominees) any mistakes wil be mistakes caused by the foreign issuer. The foreign issuer therefore has the obligation to recify those mistkes. Finally a failure to reconcile the number of CUFS on issue against the number of shares registered in the name of CHESS Depositary Nominees would be a breach of our Business Rules. II in point 2 of your letter 3. We believe that the reference to "foreign issuers custodian

does not apply in this situation. We would like to discuss this particular aspect in further detail with you.
4. Finally, we do not believe that the obligation for US registered investment companies
to maintain custody of domestic securities in the US wil detrimentally impact on the operation of our CUFS system. Thank you for advising us of this limitation. We would like to discuss these matters further with you and suggest that we speak directly with you by telephone conference on Wednesday, June 19, 5 pm your time. We wil contact you on the number noted in your letter. Should you have any difficulties in being able to discuss the issues on that date, time or phone number, please do not hesitate to contact us. Yours faithfully Michael Dalby Legal Manager, Settlement SIw\MTo\lA=6