Notice of Commission Approval – Material Amendments to CDS Rules Relating to the Destruction of Non-Transferable Issues – CDS Clearing and Depository Services Inc.

Canadian Depository for Securities Limited (CDS) rule review

October 1, 2010

In accordance with the Rule Protocol between the Ontario Securities Commission (“Commission”) and CDS, the Commission approved on September 14, 2010 amendments filed by CDS to its rules relating to the destruction of non-transferable issues (“NTI”). The amendments were effective on September 29, 2010.

Summary of Material Rule

A copy and description of the amendments were published for comment on May 1, 2009 at (2009) 32 OSCB 3855.

The majority of security certificates currently stored in CDS’s vaults are NTI. Issuers of NTI securities are usually inactive or insolvent and the lack of transfer agent services generally renders such security certificates non-transferable. Under the material rule, CDS is implementing an imaging and destruction program for NTI security certificates (“NTI Program”) that have been non-transferable for at least 7 consecutive years. CDS participant’s ledger positions in CDSX and inventory positions will be maintained under the NTI Program.

Summary of Public Comments

CDS received two sets of public comments which are summarized in Appendix A.

Revisions to the Material Rule

In consultation with its regulators, CDS has decided to make a non-significant revision to the proposed amendments for clarity purposes. The revision clarifies that an NTI must be non-transferable for seven consecutive years (as opposed to an aggregate of seven years) prior to becoming eligible for the NTI Program.

The rule amendments that were approved by the Commission are provided in Appendix B (the non-significant revision has been marked to indicate the change from the previously published version).

APPENDIX A

SUMMARY OF COMMENTS
(Public Comment Period from 2009-May-1 to 2009-May-31)

Summarized Comments	CDS Response
A commenter indicated that there should be a back-up plan in the event of failure on the main database and that prior to destruction of NTI certificates, CDS should advise Participants as well as the names of the companies that are set to be destroyed.	The databases will be backed-up each business day and to further ensure no data loss, the databases will be mirrored to CDS’s disaster recovery site. Prior to destruction of NTI certificates, CDS will issue a CDS bulletin identifying the NTI security name and ISIN number.
A commenter noted that to replace a destroyed security certificate, an indemnity bond may be required.	Under the NTI program, NTI security certificates are imaged and destroyed within a controlled environment. Where a security certificate is destroyed, it would be impossible for that certificate to be subsequently presented for transfer by a good faith purchaser. As such, there should be no need for an indemnity bond against potential loss. However, in any event, CDS has secured an insurance policy that would cover the cost of obtaining an indemnity bond if required.
A commenter also questioned whether the NTI Program would apply to transfer documents associated with the NTIs.	As CDS views all endorsements, powers of attorney or other transfer documents that were delivered to CDS at the time the securities were deposited as part of the security certificate, these associated documents would be included in the NTI Program. This approach is similar to that of The Depository Trust Company (“DTC”) in the United States. Further details regarding DTC’s program can be accessed at: http://edocket.access.gpo.gov/2004/pdf/04-15285.pdf When a security is deposited into CDSX, the depositing participant guarantees the signatures of the registered holder and each other endorser of the certificate evidencing the deposited securities (Rule 6.2.12). The guaranty is given both to CDS and to the transfer agent for that security. Additionally, the guaranty is given by the action of requesting a deposit, and is effective without the need for the participant to sign or otherwise mark the certificate. Thus the guaranty is independent of the security certificate and of any accompanying transfer documents, such as endorsements or powers of attorney. The fact that the deposited issue is NTI at the time of deposit, or becomes NTI after the deposit, does not affect the guaranty. The imaging and subsequent destruction of certificates evidencing NTI securities, and of accompanying transfer documents, is a matter of internal inventory control by CDS, and does not affect the original deposit or the participant’s contractual obligations arising from the deposit.
A commenter noted that a current transfer agent may not able to confirm if a certificate is still outstanding or has been reported lost, replaced and subsequently transferred. If so, prima facie evidence of the ownership of the securities is the security certificate.	Under the NTI program, CDS images the securities certificate (front and back) and will be able to present such image to the transfer agent. Furthermore, CDS can provide an affidavit or certificate of destruction in regards to the circumstances in which that original certificate was destroyed. CDS is a good faith purchaser for value, or a protected purchaser, of securities deposited with it. If the certificate has been re-registered into CDS nominee name, then CDS acquires the security free of any adverse claim, including the claim of an original holder. If the certificate is in “street form” (having been deposited while the security was NTI), then CDS and the transfer agent can rely on the signature guaranty given by the depositing participant.

APPENDIX B
RULE AMENDMENT

Text of CDS Participant Rules marked to reflect non-significant revisions to the proposed Rule published for comment on May 1, 2009

Text CDS Participant Rules reflecting the adoption of non-significant revisions to the proposed Rule published for comment on May 1, 2009

6.4.2 Custody of Securities

With respect to any Security held in the Depository Service, CDS shall determine how such Securities shall be handled and in particular CDS in its discretion may determine whether or not:

to require the issuance of a Security Certificate;
to cause any Security Certificate to be issued in bearer form, order form or registered form;
to cause any Security Certificate in registered form to be registered in the name of CDS, a Nominee, a Custodian or a nominee of a Custodian;
to hold any Security Certificate itself or to appoint another Person to hold any Security Certificate in its behalf;
to appoint a Custodian for any Security; or
to destroy any Security Certificate in respect of which transfers have not been available from a Transfer Agent for at least 7 consecutive years.

In exercising or determining whether to exercise any of the foregoing powers, CDS shall take reasonable care in what it, in good faith, considers to be in the best interests of all Participants.

In certain circumstances, including the maturity of a Security or a re-organization of the Issuer or a process involving the Tender of a Security, CDS may release certificates or other instruments evidencing a Security held in the Depository Service to the Issuer, its Transfer Agent, its paying agent, or a Depositary Agent, in order to complete the procedure and receive any entitlements or payments owing in respect of the Security.

to require the issuance of a Security Certificate;
to cause any Security Certificate to be issued in bearer form, order form or registered form;
to cause any Security Certificate in registered form to be registered in the name of CDS, a Nominee, a Custodian or a nominee of a Custodian;
to hold any Security Certificate itself or to appoint another Person to hold any Security Certificate in its behalf;
to appoint a Custodian for any Security; or
to destroy any Security Certificate in respect of which transfers have not been available from a Transfer Agent for at least 7 consecutive years.