Issuer Services FAQs
An “eligible security” is one that is freely tradable pursuant to U.S. securities laws and is otherwise qualified to be held at DTC and serviced. The eligibility criteria are more fully described in DTC’s Operational Arrangements. Depository services over the lifecycle of the security may include deposits, withdrawals, and a wide range of corporate action events such as dividend and interest payments, tender and rights offers, and corporate reorganizations.
For an underwritten offering, a DTC participant submits a request to make a security eligible for DTC services. Participants may also request eligibility for “older issues” which are already traded in the marketplace. DTC participants include banks, broker/dealers and other firms that act as underwriters of new issues, as well as other types of financial service institutions. An issuer seeking for an issue to become DTC eligible should work through a DTC participant that is willing to sponsor the eligibility process for the security. A participant may submit an eligibility request through DTC’s Underwriting Service at the time a security is initially offered and distributed to the marketplace, or at a later time for older issues that are not already DTC eligible. DTC’s Underwriting area may be consulted for specific eligibility requirements.
While there is no requirement that any security be held at DTC to trade, many brokerage firms and issuers want to take advantage of the efficiencies and costs benefits that DTC offers. Also, many stock exchanges require DTC-eligibility prior to listing of a security.
Throughout the lifecycle of a security, DTC helps boost efficiencies, reduce risk and lower costs for participants, issuers and investors. The benefits begin with the eligibility/underwriting process, which enables the initial distribution of a security offering to be made electronically to financial institutions that are DTC participants and ultimately to investors. Once a security becomes eligible, DTC, through its nominee Cede & Co., is the registered holder of the securities, routinely processing dividend and interest payments and managing the electronic “book-entry” transfer of interests in securities among participants. These participants are often holding and transferring interests in the securities at the direction of their customers, including ultimate beneficial owners. If a reorganization such as a corporate merger or tender offer occurs, DTC handles the transfer of cash and stock to the appropriate investment bank or broker/dealer, which then passes it on to their investors. By maintaining custody of eligible securities, DTC eliminates the risk of a missed election on a corporate action, or a missed dividend payment.
Prior to having a security made eligible for DTC services, an issuer must appoint a transfer / paying agent that will submit and adhere to an Operational Arrangements Agent Letter filed with DTC. The issuer’s designated agent(s) will work with DTC on an ongoing basis on activities related to the servicing of its security. During the lifecycle of the issuer’s security, servicing activities may include income and redemption payments, and reorganization or corporate action events including tenders, consents, name change, reverse splits, mergers, bankruptcy, etc.
The way in which investors hold securities determines what happens when they buy and sell, as well as how they receive investor communications including annual reports and voting proxies, and the way any dividends would be paid.
There are three ways in which a DTC-eligible security can be held:
Street name (least expensive / lower risk)
When an investor holds shares this way, the investor’s name is listed on its brokerage firm’s books as the beneficial owner of the shares. The brokerage firm’s name is listed in DTC’s ownership records. DTC’s nominee name (Cede & Co.) is listed as the registered owner on the records of the issuer maintained by its transfer agent. DTC holds legal title to the securities and the ultimate investor is the beneficial owner.
Direct Registration (less expensive / lower risk)
If an investor purchases securities and wants to hold them electronically in its own name rather than in street name, the investor can do so through the direct registration system (DRS). DRS allows an investor, as the owner of the security, to be the registered holder directly on the issuer’s books and records, maintained by its transfer agent. Investors who use direct registration receive a statement providing evidence of ownership instead of a stock certificate. The issuer or its transfer agent sends all investor information, dividends, and other corporate communications, including proxy materials, directly to the investor. An investor can sell directly from its DRS account, but transfer agents cannot provide a current price or limit price, thus the securities must usually be transferred electronically from the investor’s account with the issuer or transfer agent to its broker/dealer through DTC.
Physical certificate (most expensive / higher risk)
Holding shares in the form of a certificate is the more expensive, higher risk option for investors. Physical certificates can be lost, stolen or damaged, and replacement costs are high as replacement takes time to complete.
If an investor wants to obtain a physical certificate, securities are withdrawn by their brokerage firm from their account at DTC where the inventory is registered in DTC’s nominee (Cede & Co.) and re-registered into the investor’s name. In many cases brokerage firms and transfer agents charge a fee for issuing and delivering a physical certificate. In some cases, the option for a physical certificate may not be available as an investment firm may refuse requests for a physical certificate or the issuing company may have elected not to issue physical certificates.
DTC is able to provide position information on a security at the DTC participant level. Issuers and their authorized third-party agents can use DTC’s Security Position Report web service (SPR) throughout the year to obtain position information on their securities as needed. For more information, visit www.dtcc.com/spr.
DTC does NOT have beneficial owner information. Issuers need to coordinate through DTC for communications to DTC participants and these financial institutions are responsible to pass along communications to their customers who may be ultimate beneficial owners.
DTC is made aware of dividend or interest payment information related to a security in a number of ways. At the time of DTC eligibility, an issuer’s offering document is reviewed to determine if standard payment information exists on the security. If so, this information is entered onto DTC’s security master file for future processing purposes.
Payment information that has not been provided to DTC via an initial offering document at the time of eligibility is communicated in various ways. DTC obtains payment notifications (including record date information) from issuers, their authorized servicing agents, the Stock Exchanges, and other third party information sources. DTC utilizes a variety of information sources in order to meet the servicing needs of its participants and to support their provision of information to ultimate investors.
A corporate action is an event that produces a corporate restructuring, and, often, affects the value of the company’s securities. There are many types of corporate actions that can affect a security. Some of the most common include dividend and interest payments, voluntary tender offers, warrants, rights offers, corporate reorganizations, and redemption of municipal and corporate bonds.
DTC (within its Asset Services group) handles certain essential aspects of corporate action processing, many of which involve high-volume, complex activities. DTC works with issuers and their authorized agents to announce and process corporate actions in a timely and efficient manner, with heightened emphasis on risk reduction as the volume and complexity of corporate actions continues to increase.
DTC is currently undertaking a major initiative to re-engineer its technology and the way it handles corporate actions. These efforts will increase processing efficiencies, standardize corporate actions data and streamline the flow of information.
Another major innovation is the introduction of XBRL (eXtensible Business Reporting Language) technology, for corporate actions announcements. Using XBRL messages to electronically disseminate corporate actions data directly from issuers will greatly reduce the cost of corporate actions, while also reducing risk and expediting the distribution of announcements.
Issuers or their agents may provide certain information or notice to DTC for distribution to participants for processing as required. DTC participants are responsible for the distribution of information to their customers, including intermediaries and ultimate beneficial owners. Notifications to DTC should include all relevant information pertaining to the issue, including but not limited to CUSIP number(s), payment information, and any related instructions.
For timely communication with DTC, issuers and their agents should refer to the DTC Operational Arrangements to determine the correct area to notify. E-mail is the preferred method of delivery to DTC in most cases as it allows for more efficient receipt and confirmation; specific group e-mail addresses at DTC are set forth in the Operational Arrangements document.
Specific guidelines on working with DTC can be found within the Operational Arrangements to which all issuers of securities deposited at DTC, agents, and underwriters are required to adhere.
DTC may at times place temporary or permanent restrictions on certain transactions, such as deposits or withdrawals of certificates. Such a restriction is known as a chill. For example, DTC may impose a temporary chill that restricts book-entry movement of securities, effectively closing the books and stabilizing existing positions until a merger or other reorganization has been completed.
Chills are also placed when, among other things, regulators take certain actions, or when there are questions about an issuer’s compliance with applicable law.