Battle Brewing Between Brokers and Transfer Agents on DWACs?
Deposit/Withdrawal at Custodian, or “DWAC,” is the common electronic tool a stock transfer agent uses to move shares from its books, at the direction of the public company it serves, to a shareholder’s account at a broker – usually when an option is exercised. Transfer agents have charged a fee for this service (typically $25 – $50), but how and to what party has varied greatly. Some agents have buried it in a transaction “allowance” within its flat monthly stock transfer fee to the corporate client. Some agents have charged the corporate client upon each occurrence. Most agents have charged the broker, who has then either “eaten” the fee or passed it on to its client, the shareholder. We understand brokers lately have become more unhappy over DWAC fees now being passed on to them by transfer agents, either because these fees have increased or because certain agents are passing them to brokers instead of the issuer for the first time. We gather brokers, reacting to this, have started a) writing letters to issuers complaining about this development, hoping the issuer will convince its transfer agent to return to its traditional practices; and/or b) passing the transfer agent’s DWAC fee on to their shareholder client where they had not done so before.
This is likely to grab the attention of, and comment from, industry associations that influence policy among transfer agents (www.shareholderservices.org and www.stai.org), brokers (www.sifma.org) and issuers themselves (www.governanceprofessionals.org and www.niri.org). It could even hit the radar screen and elicit a response from the stock exchanges, and perhaps even the SEC.
Our own opinion is that DWAC transmission is a function transfer agents generally perform quite well, and for this they should be compensated. Indeed, it is essentially a “rush transfer” they are now expected by issuers and brokers to perform, where technically (without specific instructions) they do not have to. Moreover, as part of the DWAC process, transfer agents have to constantly be standing by to receive DWAC instructions from brokers, because brokers must “originate” these transactions. Still, the fees transfer agents charge should be reasonable, and by this we mean closer to $25 than $50. The larger transfer agents already rack up millions of dollars of DWAC fees every year.
In the final analysis, we think it is completely reasonable for a corporation or broker to consider DWAC costs something the shareholder should cover. After all, he or she is not only the beneficiary of the shares being issued, but also of the prompt, electronic medium DWAC represents. And, by charging the shareholder, no one industry participant bears all the costs of DWAC. So, the transfer agent charging the broker a reasonable fee, and the broker passing this on to the shareholder, seems to us like the best way to go.
Stay tuned for more fireworks on this topic. As part of the unfolding fabric of electronic share movement, including the Direct Registration System, DWAC is not “going away.”