Not So Fast on FAST, Say Transfer Agents

December 14, 2009
Chris Kentouris

As a registered clearing agency and self-regulatory organization, the Depository Trust & Clearing Corp. (DTCC) in New York is required to ask the Securities and Exchange Commission for permission to make even the smallest changes in rules on clearing and settling trades as they affect its members.

DTCC, parent to the Depository Trust Company, the U.S. central securities depository, typically receives approval for its requests within a few months of an application to change a rule. Approval almost always comes after the SEC has a chance to review comments from industry players.

Well, almost always.

It’s been about three years since the DTCC requested the SEC approve new – and more stringent -- guidelines for transfer agents wanting to participate in a DTCC-operated program called Fast Automated Securities Transfer (FAST).

DTCC did receive approval from the SEC for rule changes to the FAST program in June 2009, but it can’t implement them because the Securities Transfer Association, the trade group for 150 U.S. transfer agents representing 100 million registered shareholder accounts, is mounting a fierce lobbying campaign against them on the basis the agents should not be regulated by the DTCC. Such regulation would require the transfer agents to buy insurance, which the DTCC says, would protect “against the risk of loss” for securities in the transfer agent’s control.

Transfer agents are required to join the FAST program to administer the accounts of investors in corporations who hold their shares in direct registration form.

Established in 1975, the FAST program allows transfer agents to eliminate the transfer of equities certificates between themselves and DTC. Investors opting for direct registration ownership of shares can hold their shares on the books of issuers directly without holding a certificate. The issuer records an investor’s ownership position in the investor’s actual corporate or personal name.

Alternatively, the more popular nominee-name ownership or Street-name ownership, as it’s often called, allows investors to hold accounts in the name of a financial intermediary. The issuer only knows that a bank or brokerage firm owns its shares.

If adopted, the changes to the FAST program, would be the first since its introduction. Transfer agents participating in the FAST program hold securities in the form of balance certificates registered in the depository's nominee name, such as Cede & Co. FAST now has 120 transfer agents servicing 1.1 million stock issues.

On Nov.20, the STA filed a petition with the SEC asking its five commissioners to overturn the approval given by the Division of Trading and Markets, the SEC unit responsible for overseeing transfer agents.

“Such petitions are rare for organizations to file,” admits Edward Pittman, an attorney in the Washington, D.C. office of Dechert LLP representing the STA. “However, there is a fundamental difference of opinion between DTCC and the STA over who should oversee transfer agents.”

Transfer agents oppose the DTCC’s proposed requirements that they carry insurance--either a financial institution bond or a commercial crime policy. DTC wants agents with less than 25,000 transfers a year to have $10 million in insurance, and those with more to carry $25 million in insurance. Transfer agents must also carry at least $1 million in errors and omissions insurance and show proof when applying to the program. Transfer agents must also provide the depository with a copy of their two most recent examination reports from the SEC, as well as any follow-up correspondence and notice of "deficiencies" discovered by the regulator. DTCC separately must have the right to visit and inspect the facilities of transfer agents, as well as their books and records.

The STA says that transfer agents aren’t members of the DTCC, as are brokerages and banks. Therefore, the DTCC has no business regulating them. Transfer agents are already overseen by the SEC under Rule 17A(d) of the Securities and Exchange Act of 1934, according to the STA.

The DTCC counters that it can impose the new rules for its FAST program and transfer agents must abide by them if they want to participate in the program. According to the DTCC, transfer agents are acting as custodians for jumbo certificates representing FAST-eligible equities Because the FAST program eliminates the risks and costs related to the reregistration and movement of securities certificates between transfer agents and the DTCC it increases the efficiency of the nation’s clearance and settlement system.

In a statement issued to Securities Industry News, Edward Kelleher, director of communications for the DTCC, said that the DTCC is not trying to regulate transfer agents but has “taken steps to safeguard the assets entrusted to DTCC by its bank and brokerage participants.” Kelleher called the DTCC’s new insurance requirements the “type of safeguards most responsible businesses maintain.”

In a Dec. 1 letter to the SEC, Gregg Mashberg, co-head of Proskauer Rose’s litigation and enforcement group, also noted that the DTCC’s proposed changes are “necessary to maintain the safety and soundness of the securities held by transfer agents as custodian for DTC in the Fast program.”

Mashberg said that the new rules for participation in the FAST program don’t set any general national standards for transfer agents, but only requirements for those seeking to join the FAST program. “These rules do nothing to limit the Commission’s ability to set national standards for transfer agent registration and regulation and are an appropriate use of the Commission’s authority to promote the implementation of an efficient national system of clearance and settlement of securities transactions,” he wrote.

The SEC’s commissioners could revise the DTCC’s request and put it out for public comment again. Or the agency could reverse the decision made by its Division of Trading. Pittman declined to comment on any further legal action the STA could take if the SEC declined its petition or speculate on when the SEC would make its ruling. In the meantime, transfer agents joining the FAST program are exempt from fulfilling the new requirements which include additional insurance and DTCC oversight.

The proposed upgrades to FAST follow new listing requirements imposed by the New York Stock Exchange, American Stock Exchange and Nasdaq Stock Market to further reduce the number of equity certificates in circulation. As of Jan. 1, 2008, all U.S.-listed companies and Canadian dually listed companies must allow their investors the ability to hold shares in direct registration format. Such an option has existed since 1995.

Since DTC first proposed changes to the FAST system in October 2006, the organization has filed three amended versions with the SEC while transfer agents sent negative comment letters both individually and through the STA. The American Bankers Association has also voiced its disapproval with the DTC’s rule change.

“Congress did not choose to subject transfer agents to oversight by a self-regulatory organization, such as DTC.

Transfer gents are not members of DTC. Nor are transfer agents afforded the same rights and benefits generally available to members of DTC,” wrote Pittman in his letter to the SEC.
“Congress intended the Commission, in collaboration with the appropriate bank regulators, to set the regulatory standards for transfer agents.”

His comments were echoed by Charles Rossi, executive vice president of transfer agent Computershare, one of the U.S. largest transfer agents. “The DTC’s rules apply only to its members and we aren’t member of DTC,” says Rossi.

Rossi declined to specify how much the new requirements would cost transfer agents but the STA has previously indicated there would be financial burdens on smaller transfer agents.

One Midwest transfer agent contacted by Securities Industry News estimated the cost could come to anywhere from $50,000 to $100,000 annually. That’s small change for a global transfer agent the size of Melbourne-headquartered Computershare which pulled in $1.5 billion a year in revenues. But smaller independent recordkeeping shops would find it hard to absorb the additional expense which they would likely not be able to pass along to t heir issuer customers. Some say they could go out of business or be forced to sell out to larger players.