DTCC Connection

Nov 24, 2005 • DTCC Connection

Paperless Legals Program Takes a Giant Step in Year One

by John Koegel

Paperless Legals Program Takes a Giant Step in Year OneIn the drive to achieve greater straight-through processing by eliminating paper from the securities operations channel, the 10-month-old Paperless Legal program ranks as an outstanding and immediate success.

Introduced in February 2005 as a joint effort of the Securities Transfer Association (STA), the Securities Industry Association (SIA) and the Depository Trust Company (DTC), the Paperless Legal program – which does away with the need to attach legal documents when transferring certain physical securities – has won acclaim from both transfer agents and broker/dealers for saving money, time and storage space.

“More than 90% of all incoming legal transfers are now eligible for the Paperless Legal program,” says Joseph Clemente, DTCC product manager. “We’re looking to push that percentage even further.”

“Legals” are the industry’s name for stock transfers that must be accompanied by various paper legal documents, such as birth or death certificates, in order for transfers to succeed. The Paperless Legal program eliminates the need for the accompanying paper documents by having them remain with the institution requesting the transfer. Instead of forwarding all the documents, the transfer agent simply warrants that it has a medallion affixed to the transfer request. The medallion signifies that the broker has custody of the assets, according to the guidelines outlined by the STA.

‘Items Fly Right Through’

Until the Paperless Legal program was introduced, transfer agents would have to inspect each security by hand to make sure that all the required legal documents were attached before they could process the transfer.

“It was very time-consuming,” says Armando DiBiase, vice president, Stock Transfer, for The Bank of New York, one of the group of transfer agents and broker/dealers that participated in the four-month pilot program starting in October 2004. “With paperless legals, the items fly right through.”

Even “issuer-own” agents – public companies that serve as their own transfer agents – are beginning to sign up for the Paperless Legals Program. The first issuer-own agent to do so was AFLAC, the Georgia-based insurance company, which has maintained its own in-house stock transfer service since 1991. “This is a huge time savings for us,” says Joan DiBlasi, AFLAC’s senior manager for shareholder services.

Clemente expects other issuer-own agents to sign up for the Paperless Legals Program, now that the final guidelines have been published on the STA Web site at www.stai.org/pdfs/87010_STA_Guidelines_Book.pdf.

“Almost to a company, these issuer-own agents told us that when the STA published the final guidelines, they would go to their corporate secretaries and say it’s time to do this,” said Clemente. “Adding a major issuer-own agent to the program would be like adding another mid-size transfer agent. That would push us over the 90% mark.”

Million-Dollar Baby

One big reason so many transfer agents and broker/dealers are flocking to the Paperless Legal program is cost savings.

Kristin Johnson, group leader, Securities Processing, for Edward D. Jones, another of the broker/dealers involved in the pilot program, estimates that her firm will save about $60,000 this year as a result of implementing the Paperless Legal program.

“We’ve been able to reduce headcount by not filling one or two open positions,” said Johnson. “We’ve also saved on processing fees and even off-site paper-storage costs.”

Industry-wide, the cost savings are even more substantial. “We estimate that if all our participants took advantage of the Paperless Legal program, they potentially could save $1.5 million a year in costs while eliminating rejects and rework,” said Clemente.

Cross-Border Interest

Appeal of the Paperless Legal program is not limited to the United States. In early October, Canadian transfer agents that are members of the Securities Transfer Association of Canada (STAC) signed up for the program.

“We have about 10 Canadian agents now, such as Computershare of Canada and CIBC Mellon,” said Clemente. “More are joining every day.”

Most of the legal securities for Canadian issues are “dual-listed” in both Canada and the United States. “We can process issues that are listed only in Canada as well, but only if they are DTCC-eligible,” he said.

According to Terry Martinuk, vice president of compliance for Computer-share Trust Company of Canada and immediate past president of STAC, the Paperless Legal program has been well received.

“We had been following U.S. developments for several years and were looking forward to applying it more broadly to all medallion-guaranteed transactions,” said Martinuk. “Legal transfers are often subject to delay, so it’s a relief, by and large, to have that disappear.”

Enhancing the Service

In addition to allowing Canadian transfer agents to participate in the Paperless Legal program, DTC has made other enhancements to the service.

In September, DTC agreed to take restricted securities into the program. This leaves transfers valued at more than $6 million, joint tenant accounts (with rights of survivorship), bankrupt-estate transactions, and federal transfer certificates as the major exceptions to the program.

Additionally, the depository has created a new type of branch deposit to allow participants to submit legal securities where the names of the registered holder and endorser differ, thus removing one more documentation hurdle.

“This new deposit type tells us that the participant has all the legal papers to effect the transfer,” said Clemente. “It also helps prevent fails that could cause delays for both investors and participants in clearing the stock transfer.”

Editor’s Note: For more information about paperless legal stock transfers, contact Joe Clemente at 212 855-2425 or jclemente@dtcc.com.

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