Transfer Agents to DTC: Not So Fast
Do proposed operational changes overstep bounds?
June 23, 2008
U.S. transfer agents are battling with the Depository Trust Co. (DTC) over guidelines for their participation in a service that lets investors hold shares through direct registration.
Since DTC first proposed changes to the Fast Automated Securities Transfer (Fast) system in October 2006, it has filed three amended versions with the Securities and Exchange Commission. Over the past few months, transfer agents have responded with a flurry of negative comment letters sent to the SEC both individually and through the Securities Transfer Association (STA). The American Bankers Association has also voiced its disapproval.
The latest version of the proposal, published June 17 in the Federal Register, is unlikely to put the matter to rest--it retains many of the requirements of its predecessors.
At the heart of the conflict is a disagreement over the nature of the relationship between DTC, the securities settlement subsidiary of the Depository Trust & Clearing Corp. (DTCC), and the shareholder recordkeepers who use the Fast program. Transfer agents say that DTC doesn't have the right to dictate operational changes because their affiliation with the depository is commercial and not custodial. Transfer agents are regulated by the SEC under Rule 17Ad of the Securities and Exchange Act of 1934.
"The STA continues to believe that the commission would be abdicating its jurisdiction to regulate transfer agents if it were to permit DTC to implement the proposal as it is currently written," said the STA in a March 17 letter signed by president Charles Rossi, who is also EVP of client services for stock transfer agent Computershare in Canton, Mass.
But DTC argues that it must ensure the prompt and accurate clearance and settlement of securities transactions. "Transfer agents don't have the right to participate in Fast on their own terms," said Joseph Trezza, VP of product management at DTCC. "Under the Fast program, DTC does leave securities in the custody of the issuer's transfer agent in the form of balance certificates. The upgrades are designed to protect our member firms and brokerages." Trezza noted that there has been a significant recent increase in participation in Fast due to new exchange policies.
Established in 1975, the program allows transfer agents to eliminate the movement of certificates between themselves and DTC by holding securities as balance certificates registered in the depository's nominee name--Cede & Co. Fast now has over 200 transfer agent accounts representing 1 million issues.
According to DTC, the proposed upgrades--they would be the first since the introduction of the service--are required because of new listing requirements imposed by the New York Stock Exchange, American Stock Exchange and Nasdaq Stock Market to further reduce the number of certificates in circulation. As of Jan. 1, all U.S. listed companies, and Canadian dually listed companies, must allow their investors to hold shares through DTC's direct registration program, which started up in 1995. Those investors' accounts are held in their own name on the books of the issuer, and statements rather than certificates serve as proof of their ownership. Agents servicing these firms must participate in Fast.
Small Agent Woes
Smaller transfer agents have expressed concern about complying with the new requirements and some have said that DTC is going to force them out of business. Many have fallen on hard times over the past decade as shareholders increasingly opt to hold their accounts in the names of their financial intermediaries--the bank and brokerage members of DTC. Industry consolidation has left much of the business in the hands of Computershare and Bank of New York Mellon Corp.
