Prognosis for U.S. Paper Certificates: 2008 Will Mark Turning Point
In its campaign to eliminate paper stock certificates, the U.S. securities industry is making steady headway, according speakers at a recent symposium on electronic stock registration sponsored by the Securities Industry and Financial Markets Association (SIFMA). And the results are being watched globally, they added.
“What the securities industry in this country is doing to eliminate paper certificates is of interest to the broker community worldwide,” said Susan Petersen, special counsel for the Securities and Exchange Commission’s (SEC) Division of Market Regulation.
“This isn’t just about the U.S. market,” added Larry Morillo, managing director of Pershing LLC and longtime industry advocate of electronic share registration. “The entire world is watching.” The reason is that, in most of the world, paper certificates have already been eliminated and overseas investors don’t relish the idea of having to handle U.S. paper securities.
Among the speakers were Joseph Trezza, DTCC vice president, Asset Services, and Joseph Clemente, DTCC manager, Asset Services.
Advancing direct registration
At the start of 2007, major U.S. stock exchanges mandated that all newly issued equities be eligible for electronic registration via a direct registration system. Currently, DTCC’s depository subsidiary is the only registered clearing agency operating such a system. The Direct Registration System (DRS) allows investors to hold securities positions in their names, directly on the books of the transfer agent or issuer. It also allows shares to be transferred between a transfer agent and a broker electronically.
Starting in 2008, the exchanges are requiring companies to make all their outstanding shares eligible for DRS, which could result in eliminating both the need to issue paper stock certificates and the necessity of physically safeguarding them. To meet that goal fully, however, several speakers said both issuers and transfer agents need to fast-forward their preparations.
Good progress
Corporations have made substantial progress over the last year in eliminating paper certificates, according to DTCC’s Clemente. He said more than 3,000 companies now issue their stock electronically through DRS, and nearly 40% of the “withdrawal by transfer” requests DTC receives for the movement of securities positions now seek a simple – and less costly – statement of ownership rather than issuance of actual paper certificates.
What’s more, noted Katie Sevcik, senior vice president and manager of Operations for Wells Fargo Shareowner Services, some 300 of the companies now issuing shares via DRS no longer deliver physical securities at all.
The decision to join DRS by the Walt Disney Company, whose colorful share certificates are actively collected or given as gifts, is also viewed as progress. “We’re making some headway,” said James Alden, director of shareholder services for Disney. “For instance, only about 15% of shareholders in the DRS program actually call us to ask for paper certificates.” In comparison, Charles Rossi, executive vice president for client services at Computershare and president of the Shareholder Transfer Association, stated that on average, only about 1% of DRS shareholders for other issuers request certificates.
In the year 2010
DTCC expects that dematerialization of the industry’s paper certificates will be 75% complete by 2010, which means far fewer certificates still outstanding. In some cases, Clemente said, certificates are being eliminated by attrition. “Nearly a quarter of all the bearer bonds held at our depository are maturing this year and will be retired,” he noted.
As part of its preparation for increased electronic registrations, Clemente said DTC has been working to make sure that all transfer agents undergo training on DRS and the use of DTC’s Fast Automated Securities Transfer (FAST) service, which enables agents to provide custody, transfer, deposit and withdrawal services electronically.
Pending questions
Speakers at the symposium pointed out a number of actions both issuers and the securities industry need to take in gearing up for next year’s requirement that all issues be DRS-eligible. Sevcik noted that many companies may have to obtain shareholder approval to amend their corporate bylaws to permit book-entry issuance of shares. “Even if state laws no longer require paper certificates, company rules may require them and not allow for DRS statement ownership,” she said. “These companies may run out of time to change this before the end of the year.”
Another big question for companies, according to Sevcik, is whether their shares will be completely dematerialized or still offered in physical form if shareholders ask for them that way.
Timing and look of statements
How frequently transfer agents might be required to send out DRS statements to shareholders remains open, also. As Kevin McCosker, vice president for Pershing, noted, the SEC currently does not require statements to be sent on any particular schedule, nor has the industry itself come to an agreement on a uniform look for DRS ownership statements. It is expected, however, that the SEC will soon be proposing regulations governing the schedule for generating transaction advices and statements to shareholders.
Transfer agent challenges
Transfer agents have several additional issues facing them, according to other speakers. These include:
- Broader insurance coverage agents need to have in place as part of keeping their membership in DTC’s FAST program
- The need to overhaul transfer agent rules in general to reflect the changing requirements for electronic shareholding
- Creation of a mechanism for agents to become what is legally considered “a control location” so that broker/dealers can transfer management of smaller accounts over to them
- Creation of a new electronic messaging system broker/dealers and transfer agents can use to communicate directly with each other.