The industry's Paperless Legal program, which eliminates the need for accompanying paper documentation on legal securities transfers, has reached 97% participation for securities eligible for deposit at DTCC's Depository Trust Company subsidiary, DTC. Rolled out in 2004, the program is nearing full participation.

"Today, only a small fraction of the legal deposits we receive involve non-paperless transfer agents, said Joseph Clemente, DTCC product manager, Asset Services. "Transfer agents and broker/dealers have realized the benefits of going paperless when it comes to transferring securities - and the word has spread. In the first two months of 2007, more than 20 new agents have signed on and we expect to lock in all potential candidates by the end of the year. DTC will issue an Important Notice in the near future explaining its approach for gaining full participation.

The program is a collaborative initiative of the Securities Transfer Association (STA), the Securities Industry and Financial Markets Association (SIFMA) and DTC.

The medallion guarantee
"Legals is industry lingo for securities transfers that must be accompanied by paper legal documents, such as corporate resolutions, trust agreements and death certificates, in order to give the transfer agent documentation that proves the person endorsing the certificate has the proper authorization to transfer ownership. In the past, broker/dealers examined the paperwork accompanying the transfer and sent the securities with the legal paperwork to the transfer agents, who again inspected each submission by hand to ensure the proper documentation was attached.

Now, brokers retain all the paperwork, no longer sending it through the depository to the transfer agents.

"The medallion that brokers affix to the transfers serves as a guarantee that the person endorsing the certificates is fully authorized to do so, and that the proper documentation is in possession of the broker and in good order, eliminating the need for further manual review by DTC or the agents, said John Mancuso, DTCC vice president, Securities Processing.

"This new approach directly supports the industry's move towards dematerialization by eliminating the long-standing industry practice of handling multiple copies of paper legal documents among broker/dealers, DTC and transfer agents, added Mancuso.

The program also speeds transfer turnaround for investors and reduces the amount of rejected transfers through increased standardization of the process.

Trimming the fat
"Reviewing legal documents is something transfer agents have done for decades and, initially, some were reluctant to let go of the responsibility, said Cynthia Jones, executive director of the STA. "But they've come to realize that paperless legals streamlines the entire process and dispenses with the need for multiple reviews of paper documents.

Under the program, the primary responsibility of the transfer agent is to confirm the validity of the medallion accompanying the transfer. "The STA provides an excess liability insurance policy to its members that will cover them in the event a transaction is fraudulent and the surety bond attached to the medallion fails to cover the loss, for some reason. Since its inception, there have been no claims submitted against that policy, or any other notable problems for that matter, Jones said.

Cost savings
In addition to saving time and paper, broker/dealers have been able to save money on their DTC deposit fees.

Thomas Mastrogiovanni, vice president at Pershing and a member of SIFMA's Paperless Legals Subcommittee, is pleased with the cost savings his firm has realized since joining the program.

"By conducting our own examination of legal documents in house, we have been able to submit our securities as regular deposits instead of legal deposits, thus avoiding the higher processing fees associated with legals. (Regular deposits have no paperwork attached and are subject to lower DTC fees than deposits submitted with accompanying legal documentation.)

DTC will continue to assist the industry in working with customers and transfer agents to facilitate the transition to the paperless legal environment. @

[For more information on the Paperless Legal program, contact Joseph Clemente, DTCC product manager, Asset Services, at 212.855.2425 or jclemente@dtcc.com or Cynthia Jones at cjones@stai.org.]