DTC Will Pay Transfer Agents for Recordkeeping Changes
December 15, 2008
The Depository Trust Co. (DTC) has received approval from the Securities and Exchange Commission to make procedural changes to its direct registration system (DRS) and compensate participating transfer agents for the necessary systems modifications.
By March 31, all U.S. listed and Canadian dually listed companies will have to let investors hold shares through a direct registration program that DTC has operated since 1995. The investors' accounts are held in their own name on the books of the issuer, and statements rather than certificates serve as proof of ownership. The U.S. is one of the few countries that still allows investors to receive certificates for their equity holders; most are completely dematerialized.
For issuers that do not do their own shareholder recordkeeping, their transfer agents must take part in DRS for them to provide investors with proxy materials and other communications directly. Currently, the system includes about 100 transfer agents representing over 7,500 issues.
The approved alterations are designed to reduce the DRS Profile system's rejection rate--an estimated 25 percent--for instructions on the movement of accounts between transfer agents and broker-dealers. Such rejections, which occur because of discrepancies in the share quantity or an investor's Social Security number or tax identification number, can cause delays in transferring shareholder positions, which can subject an investor to financial harm if the account's value declines while the problem is being resolved.
Brokers will now be able to enter a specific share quantity or dollar value or use a new "move-all" instruction, permitting the transfer of all of the whole shares and the sale of any fractional shares held by the transfer agent. Broker-dealers will also be able to enter a second tax identification or Social Security number for joint accounts.
Transfer agents will be reimbursed for IT changes needed to implement the functionality. "Internal systems were enhanced by transfer agents, DTC participants and DTC to be able to process DRS instructions to move shares from the investor's account at the transfer agent to the investor's broker-dealer account at DTC," said Joseph Trezza, VP of operations at DTC's parent, Depository Trust & Clearing Corp.
Transfer agents who submitted their IT modification plans to DTC by September are eligible to recoup up to 75 percent of their costs, with a $200,000 maximum. DTC will also pay transfer agents 75 cents for each transaction entered by a DRS broker participant--up to $25,000 annually. To be eligible for the maintenance reimbursement, transfer agents must handle at least 200 transactions a month on the system. Two large bank transfer agents told Securities Industry News that it will cost at least $200,000 to implement the changes.
Roughly 75 percent of transfer agents who use Profile meet the compensation criteria, said Trezza, adding that lower-volume agents will continue inputting their DRS transactions using terminals, rather than file transmissions, which means minimal additional expenses. "The remuneration of transfer agents is a one-time agreement between industry members," stressed Trezza. "The initial remuneration and ongoing maintenance fees apply for agents that were already DRS-eligible. Transfer agents that join DRS in the future will be required to provide the move-all and dual Social Security number functionality as part of the DRS eligibility requirements."
Robert Carney, SVP of shareholder services for Bank of New York Mellon Corp.'s shareowner services arm, declined to say how much his bank would spend on systems alterations but called DTC's compensation package fair. "Some smaller transfer agents can rely on their third-party service providers to make system and platform changes," said Carney. "Larger transfer agents typically rely on proprietary platforms and will have to make extensive programming changes."
