STA Unhappy with DTC over Rule Making

On August 4, 2009 the Securities Transfer Association (STA), which is the official industry association for U.S. stock transfer agents, petitioned the Securities and Exchange Commission (SEC) to review – i.e., reconsider – its approval on June 30, 2009 of a rule put forward by the Depository Trust Company (DTC), the primary securities clearinghouse in America.   The rule would materially toughen the standards of transfer agents, which is probably good, right?

Yes and no.   Actually, the STA’s beef is not with the standards per se, which range from stricter securities safekeeping requirements to higher insurance to more frequent audits.   As an organization that cares about its role, and the reputation of its members, the STA has already suggested many of these tougher standards for transfer agents itself!   The problem STA has is with DTC imposing these requirements, because DTC has no official jurisdiction over transfer agents, the SEC does!   DTC is a self-regulatory body made up mostly of broker-dealers and banks.   It is registered with the SEC, just as transfer agents are.   In fact, DTC’s relationship with transfer agents is a commercial one, where to some extent they actually compete with each other as shareholder record keepers!   Transfer agents are not a self-regulating body because Congress specifically chose not make them one.   They are only accountable to the SEC.

So why did DTC dictate stricter standards for transfer agents, and the SEC officially bless their imposition of them?  Because DTC largely created, and continues to principally maintain, operational protocols that have become fundamental in securities transfer in the United States:  Fully Automated Securities Transfer (FAST) and the Direct Registration System/Profile (DRS).   FAST facilitates the movement of certificates between transfer agents and DTC.   DRS facilitates the movement of book-entry shares between transfer agents and DTC, and since this also immobilizes paper and makes securities transfer more efficient, DRS is rapidly becoming the securities transfer medium in America.   (Indeed, since January 1, 2008 all stock issues in the U.S. have had to be “DRS eligible.”) And transfer agents participating in DRS must also be “FAST Agents.”

So DTC is the keeper of critical keys in the stock transfer industry, and recognizing this the SEC has effectively given DTC extraordinary powers to dictate the strength of transfer agent participants in possession of those industry keys, especially those DTC considers having only marginal vital statistics.   In response the STA has said “Fine, toughen transfer agent standards – but let them come directly from the SEC!”  And in the absence of a response to this plea, it has submitted the August 4, 2009 petition to the SEC to “review” its earlier endorsement of DTC’s rule filing.

Our take is the STA is making a valid point about jurisdiction here.   If the wrong overseer places undue stress on the infrastructure of smaller transfer agents, it could result in an even greater contraction in the number of such service providers than is already occurring, and as a result lessen competition even further in an industry that needs more, not less, of it.   On the other hand, if stricter standards are needed amongst all transfer agents now using sophisticated tools like FAST and DRS, this needs to be addressed as well.   It sounds like the SEC needs to weigh in again on another key investor service issue, notwithstanding its already full agenda with proxy-related and other pressing matters.