Jonathan G. Katz, Secretary

Securities and Exchange Commission

450 Fifth Street, NW

Mail Stop 6-9

Washington, DC 20549

Under the proposed rule, depositories would not be required to present actual certificates prior to payment. Instead, the depository would deliver a book entry position to the paying agent’s account at the depository and the paying agent would make payment to the depository. The depository would then deliver the certificates to the paying agent after the payment date.

This proposal, as it is currently drafted, creates risk for paying agents, will require paying agents to redesign their operations and systems and will not result in any efficiency for the paying agent.

An important issue facing paying agents with the current language concerns whether the electronic delivery of securities to the paying agent’s account also creates an automatic payment from the paying agent’s account at the depository. Any delivery versus automatic payment would put the paying agent at risk because our issuers may not fund us until late on the payment date, or in the case of default, not at all. This timing difference will create a significant financial exposure for which paying agents are not compensated. If this rule moves forward, the Commission should ensure that the rule clearly states the deliveries will be "free" and not require the paying agent to advance funds on behalf of an issuer.

In addition, the rule should specify that deliveries to the paying agent’s account are irreversible. Otherwise, the paying agent could pay the depository and the participant could reverse their delivery leaving the paying agent exposed.

Even though the depository is making a book entry delivery to the paying agent, the paying agent has the certificate numbers and amounts on its system. The systems used by paying agents to process payments are typically driven by certificate number when the bond issue has physical certificates. Paying agents process payments for issues with physical certificates by debiting specific certificates and creating a check or wire. Without knowing the certificate numbers of bonds being presented, the paying agent would not be able to process the payment using current technology. The costs associated with redesigning these systems could be significant.

Furthermore, when physical certificates exist, the paying agents depend on the actual, physical certificates to be presented in order to verify the authenticity of the bondholder’s claim. Without the physical certificate in our possession prior to payment, paying agents will be required to make payment without having the opportunity to review the physical certificate. While rare, illegitimate certificates make their way into the depository’s possession and are presented for payment.

The depository currently delivers certificates for payment that are not registered to the depository. In this case, the registered holder has executed the bond power and provided supporting documentation to transfer ownership to the depository. Before the paying agent can pay the depository for this bond, the paying agent must review the supporting documentation to verify that the transfer is authorized by the registered holder and to verify that the certificate is valid. The paying agent must verify that the certificate has not been reported lost or stolen, has not been escheated or has not been cancelled for some other reason. If the paying agent is required to accept a book entry delivery of this security as proposed, we would be exposed to significant risk because we would be required to pay a certificate that may not be valid and outstanding or has not been duly endorsed by the registered holder.

The depository also delivers certificates for redemption or maturity several months and even years after the payment date. Under the proposed rule, the paying agent would need to keep the account at the depository open until all certificates had been paid or escheated. Over time, this would require the depository and the paying agent to maintain hundreds of accounts. Furthermore, the paying agent would need to review each of these accounts daily to determine if a delivery had been made by the depository. This would significantly increase work for the paying agents.

Partial redemptions will be especially difficult to process under the new proposal. When a bond issue with physical certificates has a partial redemption, part of a physical certificate may be called or some of the holder’s physical certificates may be called and others are not. In either case, the holder needs to deliver the specific certificate that is called. Under the proposed book entry delivery, this would be impossible unless the depository included certificate numbers in the electronic delivery.

If the transaction involves book entry securities, these risks and changes to operations and systems are not an issue. Since there are no physical certificates issued, the paying agent would not have certificate numbers on its records. Under this scenario, the paying agent can easily accept book entry delivery by the depository and make payment because there are no certificates to process and verify.

In order for the proposed rule to be viable for issues with physical certificates, the depository will need to report the certificate numbers of the bonds being presented through the electronic delivery system. In addition, depositories would need to establish a daily proof of their physical certificates with the paying agent to verify their position on the paying agent’s records.

There is also additional work involved for the paying agents beyond the system and process redesign issues described above. For example, the proposed rule requires the paying agent to open an account for each reorganization event. This will be a substantial amount of work for large paying agents who can have dozens of issues maturing or redeeming on a given day. To alleviate this work, the proposed rule should require the depository to automatically set up the account, or to use a single account for all reorganization events.

The proposed rule also contradicts the terms of the agreements governing the appointment of the paying agent. For example, the indenture governing a bond issue may state that the trustee can only pay the principal due on a bond when it has been presented for payment by the holder. These agreements do not contemplate electronic delivery. Therefore, if the proposed rule is going to proceed, notwithstanding the objections raised above, the rule should specifically state that paying agents do not have to require presentation of certificates by the depository notwithstanding any language to the contrary in the agreements governing their appointment.

Finally, expanding the rule to cover all reorganization events will make the depository’s job easier, but will create more work and expense for the paying agent. The paying agent will have to incur initial costs to modify systems and procedures while ongoing costs will not decrease and may in fact increase. From the paying agent’s perspective, the work to process the payment due the depository will increase because we will now have to control for the receipt of securities after the payment date and process them again when they are delivered. Furthermore, the proposed rule will not eliminate the physical movement of securities, but will rather simply move it to a different day because the depository will still need to deliver the physical certificates to the paying agent for cancellation, filming and destruction or shipment to the issuer.

Thank you for your consideration in this matter and if you have any questions please do not hesitate to call me at (615) 835-2760.

Very truly yours,

Scott Muirhead

Vice President