Direct Registration System – A Final Word Before Full Implementation
On January 1, 2008 the Direct Registration System/Profile, or “DRS,” will be the default, book-entry issuance medium for all shareholdings directly registered on the books of Corporate America, and their transfer agents. A final quick review and discussion of DRS is therefore in order.
DRS first appeared a decade ago as a reasonable issuance medium for large corporate actions taking place — like the NCR spin-off from AT&T in the spring of 1997. Most individuals like you and me were already content owning stock via a broker, where evidence of that ownership is a mere paper statement (viewable on-line). So the thought was: why continue producing stock certificates on registered issuances that a) require a lot of special (“bearer”) paper handling, b) can thus get lost or stolen, c) are expensive to have replaced, and d) as a consequence cost, it is estimated, over a quarter of a billion dollars a year in extra effort?!
As more corporate actions created more DRS stock holders, and the new protocol proved ever more popular and effective, it was only a matter of time before it would become universally mandated. A couple of key steps along the way were ironing out insurance coverage for DRS operational participants (e.g., transfer agents and brokers), and getting the various states to amend their securities laws to effectively permit registered stock issuance in book-entry form. Given so many incorporations in Delaware, that state’s elimination of a company’s obligation to issue paper certificates at all in August 2005 (even upon a shareholder’s specific request for a certificate) was a big boost for DRS.
So last year the major stock exchanges and the SEC mandated that all new issues of stock (“cusips”) must be issued in DRS as of January 1, 2007; and as of January 1, 2008 all issues (even pre-existing ones) must have stock issued in this book-entry fashion. That has put a lot of pressure on companies, and the smaller transfer agents – and even brokers – to get their DRS acts completely together by the end of this year.
What should you do if you are a corporate issuer who has not focused much on this up until now?
- Confirm your corporate by-laws permit DRS issuances and, if they do not, get them amended ASAP
- Call your transfer agent representative
- Ensure the transfer agent is fully participating in DRS
- Ask the agent, and/or directly confirm, if your state securities law permits DRS issuances
- Confirm that your agent has made, or can promptly make, your stock “DRS-eligible”
- Completely understand any optional features of that DRS eligibility which your agent may already have chosen, or may want to choose, “for you”
- Decide if you want to allow certificate issuance to a shareholder upon request, although note that hundreds of companies already don’t allow certificates at all, and we think they are wise to avoid this exception
With these matters behind you, and the New Age of DRS fully in place less than a calendar quarter from now, be aware that the industry still has some wrinkles to iron out with DRS, such as…
- The challenge of capturing all “restricted transfer legends” on stock issued in DRS, which up until now have been readily printable on stock certificates
- The probably continuing need for certificates in international stock transactions
- Effectively pledging DRS shares as collateral for loans
- Enabling shares to move from an individual’s brokerage account to his/her stock transfer account electronically, under the DRS “Profile” functionality, as readily as it already happens in the transfer agent-to-broker direction
But these matters undoubtedly will be resolved before long, because DRS is here to stay. It works, it is efficient, it saves a ton of money and aggravation, and it provides an investment experience for a directly registered shareholder that finally rivals what the holder can receive from a broker.
For more information on DRS, we suggest you log on to the following web sites (besides ours) from time to time…
http://www.dtcc.com/nomorepaper
http://www.dtc.org/dtcpublic/html/lob2/prod6/