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									Stock Certificate Dematerialization
   Presentation and Roundtable
          January 11, 2007
William J. Roberston
  Vice President
 JPMorgan Chase




                       2
Program Agenda

• Introduction
• Overview
• SEC update
• DTC update
• DRS Sub-Committee update
• Frequently Asked Questions & Answers
                                    3
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


                                           4
       Lawrence Morillo
       Managing Director
         Pershing LLC

          Chairman
      SIFMA Operations
Legal and Regulatory Committee
                                 5
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)
                                                        6
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
                                            7

     •   Other
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


                                                                        8
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
                                                     9
       Physical Securities
                        DTC Average
           Withdrawals by Transfers (WT’s) 2004-06
           Physicals       DRS                 WT’s
           #    %         # %        Total   Inc/Dec

2004 24,793 95%        1,205   5    25,998    N/A


2005 21,235 89%        2,706   11   23,941   (7%)


2006* 15,239 77%       4,535   23   19,774   (17%)
*YTD November

                                                     10
     Physical Securities
     DTC WT’s Average – November 2006
Certificate                  DRS Statement
WT:                 $28.00   WT:                 $5.00
Avg Agent fee (DMA): 5.00    Avg Agent fee (DMA): .92
Surcharge:           20.00   Surcharge:              -
_________________________    _______________________
Total:              $53.00   Total:              $5.92

               Difference = $47.08
         15,239 WT’s @ $47.08 = $717,448
     Annualized = $8.6 million additional cost!
                                                   11
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


                                             12
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


                                                           13
 Physical Securities



   “Inefficiency = Risk”

Ron Kessler – AG Edwards

                           14
           Susan Petersen
           Special Counsel
    Division of Market Regulation
U.S. Securities & Exchange Commission



                                        15
SEC Update

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




                                    16
            Joseph Trezza
            Vice President
Depository Trust & Clearing Corporation




                                      17
DTC Update

•   DRS Update/Next Steps
•   WT’s
•   Deposits
•   Non-Transferables
•   DTC Custody
•   Future

                            18
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

                                                    19
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

                                                      20
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




                                                  21
DTC Update

• DRS Next Steps
  – January 2007
    • All IPO’s 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
                                                      22
DTC Update

• DRS Next Steps
  – January 2008
    • Migrate all exchange listed issues
  – 2Q 2008
    • Discuss DTC default to DRS “statement only”
       – Currently 80% of WT’s are DRS eligible issues




                                                         23
DTC Update

• WT’s
  – 2007 Projection
     • Avg. WT’s certificate volumes  22%
     • WT’s DRS statement volumes 50%
  – 3Q 2007
     • Discuss limited processing days for WT’s




                                                  24
DTC Update

• WT’s
  – Mid 2008
    • Prepare to eliminate DMD processing
  – 4Q 2008
    • Retire DMD functionality for DRS issues
    • All WT’s to DMA for DRS eligible issues




                                                25
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 @ depository


                                                     26
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           27
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)

                                                     28
DTC Update

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




                                    29
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


                                                      30
Consensus: Go Paperless




                          31
          Katie Sevcik
     Senior Vice President
    Manager of Operations
Wells Fargo Shareholder Services

       Kevin McCosker
         Vice President
         Pershing LLC              32
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




                                             33
 DRS Sub-Committee Update
• Transfer Agent Eligibility:
   – Registered transfer agent (SEC Rule 17A (c))
   – Participates in DTC’s 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 Agent’s account number until the shareholder
     knows their new account number                              34
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 investor’s request for a “register
    and ship” in statement form




                                                35
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
                                                    36
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                           37
DRS Sub-Committee Update
• All DRS Transaction Advices/Statements
  will include:
  – Date of the transaction
  – Investor’s 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                              38
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
                                                     39
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 WT’s 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
                                                    40
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 customer’s account number, account
    registration, tax ID number except to the registered owner
                                                         41
    of the account
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 investor’s address and not the IRA custodian’s.
  – 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 Agent’s
    Dividend/Reinvestment Plan through DTC           42
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).
                                                    43
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


                                                            44
 Armando Di Biase             Donna Fremgen
   Vice President             Vice President
The Bank of New York          Merrill Lynch

                    John Hosty
        The Northern Trust Company
   Chairman, Bank Depository User Group
                     (BDUG)                    45
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)
                                              46
Frequently Asked Questions
• How does the Broker or Bank Custodian
  transfer a registered owner’s 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. DTC’s detailed specifications
   will be reviewed by the DRS Industry
   Committee in the near future.                 47
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.)
                                            48
Frequently Asked Questions
• Can a registered owner’s
  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.


                                               49
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.




                                                  50
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.               51
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         52

    available.
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.                             53
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.

                                                54
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.
                                                  55
Frequently Asked Questions
• How are Private Placements being
  addressed?
  – Private Placements are not currently held
    in DRS.




                                                56
Frequently Asked Questions
• How does a Broker/Bank Custodian
  get a restriction lifted for the
  registered owner’s 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:                       57
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 DTC’s DWAC system.
                                                        58
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.
                                                   59
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.



                                             60
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.



                                                  61
Open Forum for Questions
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


                                           62
Resources
•   BDUG - www.bdug.org
•   DTCC - www.dtcc.com/nomorepaper.com
•   SEC - www.sec.gov
•   SIFMA - www.sia.com
•   STA - www.stai.org




                                   63
Thank you for participating




                              64

								
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