The DTC and Removing A DTC Chill or Global Lock- In the first two Lawcasts in this series I discussed generally what the DTC is and the basic eligibility requirements and began a discussion of “chills” and “global locks.”
As previously discussed, at the end of the day, a DTC chill is resolved by a legal opinion letter confirming the free tradeability of shares in the DTC system and the existence of freely tradeable shares held by shareholders that are, or will become, eligible to be deposited into the DTC system. The letter must be based on a new current review of prior deposits into the DTC system including the legality of the original issuance of the securities and subsequent removal of any restrictive legend. Moreover, the letter includes a conclusion based on a legal analysis as to whether the company remains eligible to rely on rule 144.
The DTC considers itself a critical part of the U.S. securities industry infrastructure and therefore responsible for ensuring that no illegal, improperly unrestricted securities enter the marketplace. As such, DTC monitors enforcement actions, regulatory actions and pronouncements and red flags in the securities of DTC-eligible securities.A red flag includes unusually large deposits of thinly traded, low-priced securities.
Where the DTC detects suspicious unusually large deposits, they will examine whether a chill should be imposed. If DTC determines that a chill may be warranted, it will send a letter to the company and provide an opportunity for the company to respond with a legal opinion letter confirming that the deposits are proper and legal as I’ve discussed. The company generally has 20 days to respond but can ask for and receive reasonable extensions. DTC may also impose the chill first and ask for a letter second if for example there are indicia of a current fraud such as if the company has no current information, is delinquent in its SEC filings and there is an SEC or other regulatory enforcement action related to the securities.
Upon receipt of the requested legal opinion, DTC may ask additional questions, remove or not impose the chill or the chill may stay in place and become a global lock. Moreover, if a company does not timely respond to a DTC request for a legal opinion letter, does not respond at all, or the company or any of its officers, directors, or shareholders is the subject of a current enforcement proceeding claiming the illegal issuance or distribution of securities, a global lock will be imposed.
It is more difficult to remove a global lock and removal may require a waiting period to allow for any enforcement proceedings to be resolved or for the company’s securities to once again become eligible for continued use of DTC services.
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.
Founding Partner
Legal & Compliance LLC.
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