Stock Certificate Dematerialization Presentation and Roundtable

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Stock Certificate DematerializationPresentation
and Roundtable

• January 11, 2007

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• William J. Roberston
• Vice President
• JPMorgan Chase

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Program Agenda

• Introduction
• Overview
• SEC update
• DTC update
• DRS Sub-Committee update
• Frequently Asked Questions Answers

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Event Participants

• William J. Robertson - JP Morgan Chase
• Lawrence Morillo - Pershing LLC
• Susan Petersen - SEC
• Joseph Trezza - DTCC
• Kathryn Sevcik - Wells Fargo Shareholder Services
• Kevin McCosker - Pershing LLC
• Armando Di Biase - The Bank of New York
• Donna Fremgen - Merrill Lynch
• John Hosty - The Northern Trust Company

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• Lawrence Morillo
• Managing Director
• Pershing LLC

Chairman SIFMA Operations Legal and Regulatory
Committee
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Physical Securities

• Objective
• Eliminate the issuance, transfer and retention of
  paper securities certificates
• Industry costs - 250 million
• Lost and stolen - 49.4 million
• Alternatives to physical securities
• Hold in street name
• Book-entry only (municipals, governments,
  options)
• Direct Registration System (DRS)

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Physical Securities

• Direct Registration System (DRS)
• Security is registered in customer name on the
  Issuer's books
• Either Company or its Transfer Agent holds the
  security in book-entry form
• Customer receives mailings from issuer
• Statement of ownership
• Periodic account statement
• Dividends
• Annual Reports
• Proxies
• Other

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Physical Securities

• States/Other Jurisdictions
• Delaware - Industry Milestone August 1, 2005
• Eliminates requirement to provide physical
  certificates
• Corporations can issue certificates, but are not
  obligated
• Arizona, California, Louisiana, Missouri -
  completed
• Puerto Rico requires change
• Limited participation among firms
• Contacting firms in Puerto Rico to solicit
  support

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Physical Securities

• DRS Exchange Listing Requirements
• January 2007 - NEW ISSUES
• January 2008 - ALL ISSUES

• AMEX, NASDAQ, NYSE SEC approved August 2006
• NYSE ARCA SEC approved September 2006
• BSE, CHX, PHLX Rule filing with SEC October
  2006
• NSX Board meeting in November

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Physical Securities
DTC Average Withdrawals by Transfers (WTs)
2004-06

• Physicals DRS WTs
• Total Inc/Dec
• 2004 24,793 1,205 25,998
• 2005 21,235 2,706 23,941
• 2006 15,239 4,535 19,774
• YTD November

95
5
N/A
89
11
(7)
(17)
77
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Physical Securities

• DTC WTs Average November 2006

DRS Statement WT 5.00 Avg Agent fee (DMA)
.92 Surcharge - _______________________
Total 5.92
Certificate WT 28.00 Avg Agent fee
(DMA) 5.00 Surcharge 20.00 _____________________
____ Total 53.00
Difference 47.08
15,239 WTs _at_ 47.08 717,448 Annualized
8.6 million additional cost!
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Physical Securities

• DRS Education Committee
• DTC, NASD, SEC, SIFMA, STA
• Licensing requirements Series 7, 24, Continuing
  Education
• DRS Working Group rejects, process improvements
• Comprehensive DRS information for firms

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Physical Securities

• DRS Education Next Steps Firms
• Registered Reps/Operations/Customers
• Education becomes more important as DRS increases
• Alternatives to physical certificates
• Hold in street name, book-entry, DRS
• DTC
• Paper Torture Article
• Consider DRS not physical certificates
• Firms should mandate DRS default NOW!
• DTC may request a rule change

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Physical Securities

• Inefficiency Risk
• Ron Kessler AG Edwards

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• Susan Petersen
• Special Counsel
• Division of Market Regulation
• U.S. Securities Exchange Commission

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SEC Update

• DRS Regulatory Perspective
• State Laws
• Exchange Listing requirements
• Future direction

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• Joseph Trezza
• Vice President
• Depository Trust Clearing Corporation

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DTC Update

• DRS Update/Next Steps
• WTs
• Deposits
• Non-Transferables
• DTC Custody
• Future

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DTC Update

• DRS Update
• August 2006
• SEC approved rules - all exchange listed issues
  must be DRS eligible
• January 1, 2007 NEW ISSUES
• January 1, 2008 ALL ISSUES
• September 2006
• DTC filed new Transfer Agent requirements
• DRS
• FAST

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DTC Update

• DRS Next Steps
• Underwriter awareness
• Information to Syndicate Operations Division
• Letters to all underwriters
• DTC articles
• U.S. Facilities shut down
• Eliminate Hold and Bust function
• Minimal transaction volumes - 2 Busts per day
• Certificate transactions continue to decline

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DTC Update

• DRS Next Steps
• Discuss cost of Certificates vs. Statements
• Continue to raise certificate fees for DRS
  eligible issues
• Cover full cost of processing
• Lower DRS Statement cost

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DTC Update

• DRS Next Steps
• January 2007
• All IPOs to join DRS
• Begin discussions of eliminating certificates for
  DRS eligible issues
• Info exchange - DTCC Board, SIFMA, Industry
• 3Q 2007 Implement DRS enhancements
• Move all shares
• Move all, sell fractions
• Move all, sell fractions, terminate account

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DTC Update

• DRS Next Steps
• January 2008
• Migrate all exchange listed issues
• 2Q 2008
• Discuss DTC default to DRS statement only
• Currently 80 of WTs are DRS eligible issues

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DTC Update

• WTs
• 2007 Projection
• Avg. WTs certificate volumes ? 22
• WTs DRS statement volumes ?50
• 3Q 2007
• Discuss limited processing days for WTs

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DTC Update

• WTs
• Mid 2008
• Prepare to eliminate DMD processing
• 4Q 2008
• Retire DMD functionality for DRS issues
• All WTs to DMA for DRS eligible issues

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DTC Update

• Deposits
• 4Q 2007
• Certificate Automated Select Service (CASS)
• Phase I
• Agent participation
• Certificate verification process
• Phase II
• Explore agent capacity
• Willingness to participate
• Truncate certificate _at_ depository

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DTC Update

• Non-Transferables
• 2006
• Over 1 million certificates in vault
• PREM, destruction process continues
• 350,000 certificates destroyed in 2006
• 33 of current inventory
• Economies of scale diminish
• January 2007
• Fees increase - 7.00 per position
• 3Q 2007
• Explore eliminating new deposits
• Consider additional fee increases

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DTC Update

• DTC Custody (Non-Cede)
• 2007
• Growth continues - less fungible certificates
• Vault - over half million certificates and
  growing
• All manual processes, no economies of scale
• 1Q 2008
• Recommend right-sizing fees
• 3Q 2008
• Plan to retire Envelope Settlement Service (ESS)

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DTC Update

• DTC Custody (Non-Cede)
• 1Q 2009
• Evaluate processing options
• Efficiencies
• Cost reduction
• Location

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DTC Update

• Future
• 2008
• DRS/FAST - 400 agents
• DRS - over 10,000 issues
• Industry consideration of eliminating
  certificates
• 2010
• Immobilization complete
• Few, if any, certificates in system

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Consensus Go Paperless
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Katie Sevcik Senior Vice President Manager of
Operations Wells Fargo Shareowner Services

• Kevin McCosker
• Vice President
• Pershing LLC

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DRS Sub-Committee Update

• Issuer/CUSIP Eligibility
• Corporate by-laws must permit the issuance of
  book-entry shares
• CUSIP must be DTC and FAST eligible
• Must provide DTC 10 days notice prior to DRS
  activation

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DRS Sub-Committee Update

• Transfer Agent Eligibility
• Registered transfer agent (SEC Rule 17A (c))
• Participates in DTCs FAST program
• Execute a DRS Limited Participant Account
  agreement
• Able to store new data fields
• Investor account number at the Broker/Dealer
• Broker/Dealer firm name
• DTC participant account number
• Payment Surety Plan (PSP) number at the
  transaction level
• Capability to match a Profile move request on the
  prior Transfer Agents account number until the
  shareholder knows their new account number

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DRS Sub-Committee Update

• Broker/Dealer Eligibility
• Must be a DTC participant
• Must have a Profile Surety Program (PSP) number
  to initiate share movements
• Must honor the investors request for a register
  and ship in statement form

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DRS Sub-Committee Update

• The following DRS information will be provided on
  the DRS Statement or check stub
• Full Registration
• DRS Account number at the Transfer Agent
  identified on the statement as Account Number
• Number of shares held in DRS (not necessarily
  shares held in DRIP)
• Total number of DRS restricted shares, if
  applicable
• CUSIP number or symbol (must be industry
  assigned 9 digit number or ISIN number)
• Statement Date

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DRS Sub-Committee Update

• All DRIP Statements will include
• Full Registration
• DRIP Account number at the Transfer Agent
  identified on the statement as Account Number
• Number of shares held in DRIP (not necessarily
  shares held in DRS)
• Total number of DRIP restricted shares, if
  applicable
• CUSIP number or symbol (must be industry assigned
  9 digit number or ISIN number)
• Statement Date

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DRS Sub-Committee Update

• All DRS Transaction Advices/Statements will
  include
• Date of the transaction
• Investors Broker/Bank Custodian account number
  and firm name for that particular transaction
• Number of shares for the transaction
• CUSIP number or symbol (must be industry assigned
  9 digit number or ISIN number)
• DRS Account number at the agent identified on the
  statement as Account Number
• Full registration

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DRS Sub-Committee Update

• Moving shares from a DRS account to a Broker or
  Bank Custodian
• Initiated by the receiving Broker/Bank Custodian
• Authorization from the end customer is required
• Review most recent statement (have investor
  verify share amount with the agent if the
  statement is old )
• Request DRS and DRIP accounts only
• Compare account details
• Verify tax ID with customer (especially joint
  accounts)
• Maintain a list of account number formats
• Add to the "Profile" System
• Maintain paperwork physically or electronically
  (based on federal and state law) at the
  Broker/Bank Custodian

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DRS Sub-Committee Update

• Moving shares from a Broker/Bank Custodian to a
  DRS account
• Initiated by the delivering Broker/Bank Custodian
• Authorization required to deliver shares
• Broker/Bank Custodian submits a WTs through DTC
  and indicates S for DRS statement
• DTC sends account number to the Broker/Bank
  Custodian
• Transfer Agent sends confirmation to registered
  holder
• Maintain paperwork physically or electronically
  (based on federal and state law) at the
  Broker/Bank Custodian

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DRS Sub-Committee Update

• Known Issues
• DRS statements are issued when sending securities
  for corporate actions or transfers
• Broker/Custodian loses control of the assets
• Gifting of assets - Statements are issued
  directly to the recipient of the gift instead of
  presenter
• Statements not sent by all Transfer Agents on a
  scheduled basis as it is not required by UCC or
  SEC regulations
• Privacy laws restrict agents from divulging
  information such as the customers account
  number, account registration, tax ID number
  except to the registered owner of the account

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DRS Sub-Committee Update

• Known Issues (continued)
• Certificated IRA Custodial accounts will have new
  shares issued in DRS form and the statement will
  be sent to the address on record. This address
  may be the investors address and not the IRA
  custodians.
• IRA Custodial accounts are issued in DRS form
  without the custodians acceptance
• No way to request All shares and liquidate
  fractions, industry is working on a solution
• Transfer Agents are not designated a control
  location therefore Brokers can not hold DRS
  accounts on their books
• DRS Issues that are held at a Broker in
  street-name are not always eligible for the
  Transfer Agents Dividend/Reinvestment Plan
  through DTC

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DRS Sub-Committee Update

• Known Issues (continued)
• DRS and Dividend Reinvestment Plans cannot be
  combined at the Transfer Agent. Therefore,
  multiple statements may exist, one for each share
  type.
• Restricted shares may be held in DRS, however,
  they are not eligible to move through the
  "Profile" System until the restriction is lifted.
  
• Broker/Bank Custodians submitting physical shares
  through DTC for corporate action processing may
  also need to request any DRS shares through the
  "Profile" System. (this occurs when a registered
  owner holds both physical and DRS shares).

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DRS Sub-Committee Update

• Impact of dematerialization upon custodian
• Safekeeping of Securities
• Statements cannot be held in lieu of certificates
• Restricted Securities
• Only non-certificated corporations can be held in
  DRS
• Asset Receipts
• Currently activity advices are not sent to the
  Broker/Bank Custodian once a DRS transaction is
  complete

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• Donna Fremgen
• Vice President
• Merrill Lynch

Armando Di Biase Vice President The Bank of New
York
John Hosty The Northern Trust Company Chairman,
Bank Depository User Group (BDUG)
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Frequently Asked Questions

• How does a registered owner obtain the most
  recent DRS or Dividend Reinvestment statement?

• Most Transfer Agents have on-line account access.
  If the investor has signed up for on-line
  access, they should be able to obtain the
  required information. If on-line access is not
  available the investor could also contact the
  Transfer Agent and request a duplicate statement.
  (a fee may be assessed for this service)

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Frequently Asked Questions

• How does the Broker or Bank Custodian transfer a
  registered owners entire book-entry position
  from a DRS/Dividend Reinvestment account to a
  brokerage account?

• Currently an ALL share feature is not available
  in the "Profile" System. The industry is
  reviewing enhancements to various systems that
  are required to offer this feature. DTCs
  detailed specifications will be reviewed by the
  DRS Industry Committee in the near future.

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Frequently Asked Questions

• Can the Broker/Bank Custodian request DRS and
  Dividend Reinvestment Plan shares on one
  "Profile" System request?

• Yes, Transfer Agents are required to move both
  eligible DRS and Dividend Reinvestment Plan
  shares through the "Profile" System. The
  Broker/Bank Custodian can combine the shares and
  submit in one transaction. (Do NOT add securities
  held by investor in certificate form.)

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Frequently Asked Questions

• Can a registered owners Broker/Bank Custodian
  request that their DRS shares move to a DRIP Plan
  through the "Profile" System?

• No, the registered owner must contact the
  Transfer Agent and complete the required Dividend
  Reinvestment Plan enrollment forms.

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Frequently Asked Questions

• Can fractional shares transfer out of a
  registered owners DRS/Dividend Reinvestment Plan
  to the Broker or Custodian if added to the
  "Profile" System?

• No, currently it is not possible to add
  fractional shares to the "Profile" System or
  transfer those shares.

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Frequently Asked Questions

• How does a Broker or Custodian liquidate the
  fractional shares not transferred from a
  registered owners DRS /Dividend Re-investment
  account?

• Currently there is no systematic way to liquidate
  the fractional shares without contacting the
  transfer agent.

• Depending upon the terms of the DRS/Dividend
  Re-investment plan, some will automatically
  liquidate other plans require the registered
  owner contact the Transfer Agent to liquidate.

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Frequently Asked Questions

• If the registrations at the Brokerage account and
  DRS/Dividend Re-investment account do not match,
  how do you request DRS/Dividend Re-investment
  positions?

• The Broker/Bank Custodian is responsible for
  maintaining any paperwork required when
  transferring accounts that are not like to like
  registrations.

• These requests must be submitted through the
  "Profile" System under the registered owners
  account number and Tax ID for domestic
  holders. For foreign holders the account number
  and title is required since a Tax ID is not
  available.

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Frequently Asked Questions

• Is Legal paperwork required to process a
  DRS/Dividend Reinvestment transfers (e.g.
  Corporate Accounts and Estate accounts) ?

• The Broker/Bank Custodian must maintain the
  normal legal paperwork to transfer these types of
  accounts. Entering the request on the "Profile"
  System guarantees you have all the proper
  endorsements required to facilitate the transfer.
  Please refer to your DRS Profile Surety language.

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Frequently Asked Questions

• What happens if a Broker/Bank Custodian requests
  a registered investors account through the
  "Profile" System on payable date of a dividend in
  a reinvestment plan ?

• The shares should move with the initial
  transaction, but it is a best practice to review
  the statement after the transaction to ensure all
  shares have moved.

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Frequently Asked Questions

• Can a registered owner sell a position at their
  broker while the shares are still held in
  registered form at the agent (DRS).

• Policies vary between brokers, a DRS transaction
  can be completed in as few as 24 hours. Some
  firms will allow the sale and expect delivery on
  settlement date, other firms have established
  policies to obtain the position before the sale
  can take place.

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Frequently Asked Questions

• How are Private Placements being addressed?

• Private Placements are not currently held in DRS.

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Frequently Asked Questions

• How does a Broker/Bank Custodian get a
  restriction lifted for the registered owners DRS
  shares? (e.g. 144 shares) (Example 1)

• The Broker/Bank Custodian can submit the required
  paperwork to the Transfer Agent to have the
  restriction lifted.

• Upon completion, the Transfer Agent sends the
  investor a DRS statement or transaction advice
  which can be provided to Broker/Bank Custodian to
  move the shares.
• OR

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Frequently Asked Questions

• (Example 2)

• The Broker/Bank Custodian should submit the
  required paperwork to the Transfer Agent to have
  the restriction lifted and include a stock power
  with instructions to electronically transfer
  (DWAC) the shares.

• When the restrictions are lifted, the agent will
  contact the Broker/Bank Custodian and instruct
  them to request the shares electronically through
  DTC. The agent will accept the instructions
  through DTCs DWAC system.

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Frequently Asked Questions

• Can a registered investor with a DRS account get
  a physical certificate from the Transfer Agent?

• Yes, some issues still have certificates
  available and a certificate can be requested if
  the registered owner calls the Transfer Agent
  directly.

• Other DRS issues may only be available in
  book-entry form.

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Frequently Asked Questions

• What is the turnaround time for processing a DRS
  transfer?

• Transfer Agents have 48 hours to process the
  request. An additional 24 to 48 hours should be
  allotted to the Broker/Bank Custodian to review
  the request and submit it through the "Profile"
  System.

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Frequently Asked Questions

• Can a Broker/Bank Custodian submit a physical
  certificate to the Transfer Agent for a reorg,
  stock split or transfer and get a certificate
  back?

• Yes, if the instructions specifically state issue
  a new certificate, the Transfer Agent should
  provide one if available.

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Open Forum for Questions

• William J. Robertson - JP Morgan Chase
• Lawrence Morillo - Pershing LLC
• Susan Petersen - SEC
• Joseph Trezza - DTCC
• Kathryn Sevcik - Wells Fargo Shareowner Services
• Kevin McCosker - Pershing LLC
• Armando Di Biase - The Bank of New York
• Donna Fremgen - Merrill Lynch
• John Hosty - The Northern Trust Company

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Resources

• BDUG - www.bdug.org
• DTCC - www.dtcc.com/nomorepaper.com
• SEC - www.sec.gov
• SIFMA - www.sia.com
• STA - www.stai.org

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Thank you for participating