Certificates Get a Big Push Toward Retirement

by Edward C. Kelleher

Catherine R. Kinney, NYSE president and co-chief operating officer

The securities industry has dealt another blow to paper. In a change marking a watershed in the use of certificates in U.S. capital markets, companies that trade on the New York Stock Exchange (NYSE), NYSE Arca, Nasdaq and the American Stock Exchange will be required to offer DTCC’s Direct Registration System (DRS), which enables investors to register ownership of their shares electronically with either the issuing company or its transfer agents.

The eventual goal is the elimination of paper certificates, whose use "has long been identified as an inefficient and risk-laden mechanism" for holding and transferring securities, according to the Securities and Exchange Commission (SEC).

The SEC approved the rule change after the four organizations requested earlier this year that DRS be made a listing requirement.

The timetable

Under the rule change, newly listed issues coming to market on or after January 1, 2007, will be required to be DRS-eligible on the first day of trading. Existing listed issues will have to become DRS-eligible by January 1, 2008.

DRS enables companies and investors to do away with paper certificates altogether. It provides for electronic direct registration of eligible securities in an investor’s name on the books of a transfer agent or issuer, and allows transfer agents and brokers to transfer shares between each other electronically. Shares also can be held electronically in street name through a participant of The Depository Trust Company (DTC).

More efficiency; less risk

In approving the requirement, the SEC wrote that DRS should provide "more accurate, quicker and more cost-efficient transfers; faster distribution of sale proceeds; reduced number of lost or stolen certificates and a reduction in the associated certificates
replacement costs...."

Lawrence Morillo, managing director
of Pershing LLC and chairman of
the SIA’s Operations Legal and Regulatory Committee

"The NYSE welcomes the SEC's approval of the Exchange rule change that will require listed companies to be eligible to participate in DTCC's DRS system," said Catherine R. Kinney, NYSE president and co-chief operating officer, who is also a DTCC director. "This rule change is another example of how the exchanges, DTCC and the securities industry continue to work closely together.

Participation in DRS will provide public companies, their shareholders and the transfer agents with greater efficiencies and reduced costs in connection with securities processing," Kinney said.

"This is a major step in advancing the industry goal of dematerialization and the eventual elimination of paper certificates," said Donald F. Donahue, DTCC's president and CEO. "In addition to reducing costs, DRS gives investors greater security and greater flexibility in transferring or selling the securities."

The Securities Industry Association (SIA) estimates that the industry's cost for handling paper certificates each year is more than $250 million, and that about 2 million certificates are lost each year, with a replacement cost of approximately $50 million.

Spreading the word

Katie Sevcik, senior vice president and manager ofoperations, Wells Fargo Shareowner Services

"The ruling will get people to focus on DRS sooner rather than later," said Lawrence Morillo, managing director of Pershing LLC and chairman of the SIA's Operations Legal and Regulatory Committee, which has been pushing for the reduction and eventual elimination of physical securities certificates.

"I'm optimistic that investors will start choosing DRS and DRS statements once they learn the cost difference is significant – a statement may cost $6 while a certificate may cost $60 or more," said Morillo. "At Pershing, we're going to be pro-active with DRS and start to default to it when a security becomes DRS-eligible."

Educating the industry about DRS now becomes more important than ever. "We have to look at those issuers that have not moved yet on DRS," said Katie Sevcik, senior vice president and manager of operations for Wells Fargo Shareowner Services.

"Even though DRS will become a listing requirement, it is anticipated that some companies may have to amend their bylaws and have the change approved at their annual meetings. There will need to be a more in-depth education effort for front-line brokerage firms and their investors, advising the investors about the benefits of both 'street' and DRS ownership," Sevcik added. "Some investors are still asking for certificates because they think it's the only way they can move their shares." She said some transfer agents, and issuers that are their own transfer agents, will also need to be brought up to date on DRS, how it works and what its benefits are."

Choosing DRS

"More companies are electing to offer DRS each year because they know that savvy investors will choose to register their shares electronically," said Joseph Trezza, DTCC vice president, Asset Services.

The number of issues that are DRS-eligible has grown to 1,234 at present. Trezza said the new listing requirement will add approximately 10,000 issues by 2008, and potentially an additional 250 existing transfer agents will join the program. @