Global Locks
DTC may impose a Global Lock, which suspends both deposits and book-entry transfers of a security, as well as withdrawals and physical deliveries of the security, based on legal actions commenced by government or law enforcement authorities, most typically the SEC. Additionally, DTC will impose a Global Lock if an issuer fails to satisfy the requirements for lifting a Deposit Chill.
Issuer Notification of Global Lock
DTC will provide the issuer with written notice of the Global Lock via overnight courier. DTC will send the notice no later than twenty business days prior to the imposition of the Global Lock or, if the Global Lock is imposed prior to giving notice, no later than three business days after the Global Lock is imposed. DTC will impose a Global Lock prior to notice where there is a threat of imminent harm or injury to DTC or the industry. This would include situations where the SEC has alleged that the defendants in a civil or criminal action are in possession of additional unregistered shares that they could deposit into the DTC system. If DTC acts prior to notice, the issuer will have the opportunity to show that there is no meaningful risk of imminent harm or injury.
The Global Lock notice will, among other things, include the reason for the Global Lock and identify the regulatory or law enforcement proceeding upon which the restriction is based. It will note the date the restriction was or will be imposed, and that the issuer has twenty business days to respond, although DTC may provide a twenty-business-day extension for good cause.
The Global Lock notice will afford the issuer the opportunity to demonstrate that the securities deposited at DTC were not the subject of the legal proceeding on which DTC based its restriction. The issuer will also have the opportunity to demonstrate that the proceeding has been withdrawn, dismissed, or otherwise resolved in favor of the defendant that deposited the securities at DTC. Otherwise, DTC will restrict the securities, based on the allegations in the pleadings.
DTC Review of Issuer Response to the Global Lock Notice
DTC will respond in writing to the issuer’s response to the Global Lock notice within twenty business days or, if the Global Lock has been imposed prior to notice, within ten business days.
Where DTC bases a Global Lock on allegations in an SEC enforcement action or other regulatory or law enforcement proceeding, DTC’s review is necessarily limited. It will not provide the issuer with an alternative forum in which to litigate the issues pending before a court or administrative agency.
Where a Global Lock results from the issuer’s failure to satisfy DTC’s eligibility concerns that led to Deposit Chill, the procedure for releasing the Lock is described below.
Determination
If DTC determines that the issuer’s Global Lock response satisfies the conditions set forth in the Global Lock notice, DTC will release or not impose the Global Lock. Otherwise, DTC will impose the Global Lock or maintain one previously imposed.
Procedures For Removing Restrictions
DTC’s proposed rule will also seek SEC approval to reinstate full services under the following circumstances.
Under the Safe Harbor provision of Securities Act Rule 144, restricted securities may become freely transferable after a specified holding period has elapsed. Because securities that have been Globally Locked have been credited to participant accounts without transfer during the period of the Global Lock, DTC is proposing, by analogy to Rule 144, to release Global Locks after the following periods have elapsed:
If the Global Lock is the result of a judicial action or administrative proceeding alleging that the issuer’s shares had been distributed in violation of Section 5 of the Securities Act:
DTC may lift the Global Lock one-year after the latest date on which the outstanding litigation or administrative proceeding has been resolved with respect to any defendant that deposited the securities at DTC. This one-year approach applies to issuers that are not SEC reporting companies, DTC may lift the Global Lock six-months after the latest date on which the outstanding litigation or administrative proceeding has been resolved with respect to any such defendant. This six-month approach applies to issuers that are SEC reporting companies. In the case of SEC-filers, DTC may lift the Global Lock six-months after the latest date on which the outstanding litigation or administrative proceeding has been resolved with respect to any such defendant.
If the Global Lock is the result of an issuer’s failure to respond or to respond adequately to a Deposit Chill notice:
DTC may lift the Global Lock one year after the date it was imposed for issuers that are not SEC reporting companies, and after six months for issuers that are SEC reporting companies.
The release of a Global Lock under these circumstances would only be available to an issuer that is not, and never has been, a “shell company” as defined in Securities Act Rule 144(i), unless the issuer had ceased to be a shell company and filed the specified disclosures required by this rule to no longer be deemed a shell company. If new facts come to light during the six-month or one-year period that call into question whether the securities satisfy DTC’s eligibility requirements, DTC may not release the Global Lock (subject to the fair procedures discussed above.)
When approved by the SEC, the new DTC proposals will eliminate most of the confusion surrounding the imposition of Chills and Global Locks, and will make it easier for issuers to avoid them, or to see to their removal once imposed.
