The Depository Trust Company and DTC Eligibility Requirements- DTC stands for the Depository Trust Company. DTC is a central securities depository in the U.S. which was originally created as a central holding and clearing system to handle the flow of trading securities and the problems with moving physical certificates among trading parties.
DTC is regulated by the SEC, the Federal Reserve System and the New York State Department of Financial Services. Today, and as noted by the SEC, “… DTC provides clearance, settlement, custodial, underwriting, registration, dividend, and proxy services for a substantial portion of all equities, corporate and municipal debt, exchange traded funds, and money market instruments available for trading in the United States.
DTC eligibility is a prerequisite for OTC company shareholders to deposit securities with their brokers and have such securities traded in the open marketplace. Obtaining and maintaining eligibility is of utmost importance for the smooth trading of a company’s stock in the secondary market. If the DTC doesn’t process and settle trading in your securities, it just doesn’t happen.
First, like a Form 211 submittal to FINRA, an Issuer cannot make direct application to DTC for eligibility. An application must be submitted and sponsored by a DTC Participant. Many market makers and transfer agents that I work with offer the service and of course I assist clients in completing the process. Once eligible, DTC reviews such securities for continued eligibility every time a company completes a corporate action that include obtaining a new CUSIP number, such as a name change or reverse split.
The DTC application itself is not long or complicated and the application process is usually not difficult as long as the company meets the eligibility requirements. However, DTC has the ability to request additional documentation and responses to comments.
All securities deposited in DTC are fungible and freely tradeable. Accordingly, to be eligible, the company must have freely tradeable securities in the hands of stockholders. Those securities must have (i) been issued under an effective registration statement; or (ii) issued in a private transaction and be no longer restricted be reference to Rule 144. Also, to be eligible for DTC, a company must have at least one shareholder that holds freely tradeable securities, that is ready and planning on depositing such securities into the DTC system. Moreover, a company must use a DTC participating transfer agent.
Once a DTC application is submitted, DTC will notify the applciant whether a legal opinion letter is necessary. Legal opinion letters must be provided by an experienced securities practitioner, properly licensed in the subject jurisdiction and in good standing with their bar association. Legal opinions confirm the free tradeability of securities to be deposited into the DTC system including either through the registration of such securities or availability to use Rule 144. Generally such legal opinions are necessary.
In the next Lawcast in this series, I will begin the discussion of DTC chills and locks on a company’s stock.
I’m securities attorney Laura Anthony, Founding Partner of Legal and Compliance, LLC. Should you have any questions about today’s topic visit SecuritiesLawBlog.com and LawCast.com, or contact me directly. Inquiries of a technical nature are always encouraged.
Laura Anthony, Esq.
Legal & Compliance LLC.
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