DTC Overview

In 1994, the Securities Exchange Commission (SEC) requested the securities industry to explore the means for providing investors with an additional approach to holding securities in certificateless form. With this objective in mind, a joint industry working committee was formed, with participation from various industry members, including:

• The New York Stock Exchange (www.nyse.com)
• The Securities Transfer Agent Association (www.STAI.org)
• The Securities Industry Association (www.sia.com)
• The Corporate Transfer Agent Association (www.corpta.org)
• The Depository Trust Company
• The SEC (www.sec.gov)

Under direct registration book-entry positions, investors electing to have their ownership of securities registered directly on the issuer’s records would have the option of a direct registration book-entry position recorded on the books of the transfer agent. (Uncertificated book-entry registration has been widely used in the mutual fund industry for many years.)

With the implementation of direct registration, investors have three securities ownership options:

• Physical Certificates: Certificates are registered and issued in the investor’s name. The investor will receive all mailings directly from the issuer or its transfer agent, including dividend or interest payments, annual reports, and proxies.
• Street Name Registration: Securities are registered in the street name of the investor’s broker-dealer. While no physical certificate will be issued to the investor, the broker-dealer will issue, at least quarterly, account statements of the investor’s holdings. The broker-dealer will pay dividends or interest to the investor, as well as provide the investor with mailing material from the issuer or transfer agent.
• Direct Registration: This option allows the investor to be registered directly on the books of the transfer agent without the need of a physical certificate to evidence the security ownership. While the investor will not receive a physical certificate, he or she will receive a statement of ownership and periodic (at least yearly) account statements. Dividend or interest payments, proxy materials, annual reports, etc., will be mailed from the issuer or its transfer agent.

In 1996, through the efforts of the joint industry working committee, the Direct Registration System (DRS) was implemented by DTC. DRS enables participants and qualifying transfer agents, known as limited participants, to electronically move an investor’s security positions between street-name ownership and direct registration book-entry position. DRS uses similar processing as DTC’s Delivery Order (DO) functions to move positions, with specific reason codes to identify the transaction as a DRS transaction.

To support the industry’s move to direct registration, the NYSE modified its listing criteria to permit listed companies to issue book-entry statements (“transaction advices”) in lieu of certificates for corporate action distributions, e.g., spin-offs and stock splits. Since then, there has been a steady growth in issuers offering direct registration, with over 300 issuers currently eligible for DTC’s DRS service. When DRS was introduced, investors electing to initiate the transfer of their securities ownership from one form of ownership to another would have to submit the paper transaction advice to the transfer agent (limited participant), or to their broker-dealer. If submitted to the broker/dealer, the broker/dealer would forward the paper transaction advice to the limited participant. The investor’s signature on the transaction advice would require a medallion guarantee. In essence, in the early stages of DRS, the industry exchanged one form of paper transaction, the physical certificate, for another form of paper, the transaction advice.

Profile Modification System

In May 2000, the Profile Modification System (Profile) was implemented by DTC to electronically convey an investor’s request to move from one form of securities ownership to another. Profile takes the place of the paper transaction advice for electronic movement of securities positions between street-name positions and direct registration book-entry positions. Profile includes all the data fields listed on the paper transaction advice, including the investor’s broker-dealer account number, investor’s DRS account number, Tax I.D./Social Security number, full registration, and CUSIP.

Profile is an electronic communication medium between participants and limited participants that conveys the investor’s instructions. The actual movement of positions from one form of securities ownership to another takes place in the DRS.

In April 2000, the SEC approved DTC’s rule filing which incorporated a screen-based indemnification to accommodate those issuers wanting to process securities in DRS pursuant to a Profile request. The screen-based indemnification provides that:

For participants entering a transaction

1) Participant represents that it has the actual authority and consent for the request appearing on the following screen from either to either (A) the registered owner or owners on the participant’s records or (B) a third party who has actual authority and legal capacity to act on the behalf of the registered owner or owners on the participant’s records, and that all information shown is accurate and complete, except that, with respect to the tax payer identification number included in such information, to the to the best knowledge of the participant, such information is accurate and complete;

2) Participant indemnifies the issuers, its transfer agent and its officers, directors, shareholders, employees, agents, representatives, subsidiaries, parents, affiliates, successors and assigns against any loses, expenses, liabilities, or judgments (including but not limited to fees and expenses of counsel) arising from a breach of such representations in connection with the transaction that is the subject of such request.

For transfer agents entering a transaction

1) Transfer agent represents that it has the actual authority and consent for the request appearing on the following screen from either to either (A) the registered owner or owners on the transfer agent’s records or (B) a third party who has actual authority and legal capacity to act on the behalf of the registered owner or owners on the transfer agents’ records, and that all information shown is accurate and complete, except that, with respect to the tax payer identification number included in such information, to the to the best knowledge of the transfer agent, such information is accurate and complete;

2) Transfer agent indemnifies the participant its officers, directors, shareholders, employees, agents, representatives, subsidiaries, parents, affiliates, successors and assigns against any loses, expenses, liabilities, or judgments (including but not limited to fees and expenses of counsel) arising from a breach of such representations in connection with the transaction that is the subject of such request.

With the SEC approval of this capability, coupled with the Profile Surety Program referenced below, Profile now offers the electronic equivalent of a medallion guarantee, providing comparable security to the transfer agent and the issuer that they previously had received through the signature guarantee on the paper transaction advice.

Profile Surety Program

In February of 2001, DTC introduced the Profile Surety Program (PSP). PSP provides for a surety bond to back the representations a party makes under the screen-based indemnity, providing an additional layer of protection and mitigating any risk for industry members using DRS and Profile. Based on the concept of the medallion guarantee programs for paper based transactions, PSP is an electronic medallion program only available to DTC’s participants and limited participants (transfer agents) participating in DRS and Profile.

On acceptance to the PSP, participants and limited participants are issued a unique identification number, called a PSP number, that is electronically associated with their DTC system sign-ons and passwords. Since May 4, 2001, all Profile electronic instructions have required the initiating entity, whether participant or limited participant, to input a valid PSP number. Applications to join PSP are still being accepted.

Transfer Agent Eligibility

The following criteria must be met by a transfer agent (whether commercial transfer agent or an issuer-own agent) to be eligible to process transactions in DRS/Profile:

• Become a limited participant of DTC
• Participate in DTC’s Fast Automated Transfer Program (FAST) program
• Provide a Direct Mail by Agent (DMA) function
• Have electronic communication links with DTC
• Receive training on DRS and Profile
• Participate in a Surety program to initiate Profile transactions.

Issue Eligibility

The following criteria must be met by a securities issuer to be eligible for DRS/Profile:

• Participate in FAST program
• Participate in Profile
• Mail DRS Book-Entry Statements to registered owners at least once a year.

Participant Eligibility

The following criteria must be met by a participant to be eligible to process transactions in DRS/Profile:

• Participate in a Surety program to initiate Profile transactions.
• Default all WT requests to “S” for statement unless specifically requested otherwise by the investor.

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