DTC is a subsidiary of the Depository Trust & Clearing Corporation. It is the largest security depository in the world and holds more than thirty-five trillion dollars worth of securities on deposit. The DTC eligibility means that the public company securities are able to be deposited through DTC. Usually clearing firms are the participants of DTC through which it accepts the deposits securities. Most brokers clear stock in-house or hire a clearing firm to do so on their behalf. All movements of securities are made to the participant’s account electronically with book-entry adjustments.
If any issuer is not eligible for DTC then his shares cannot be transferred between brokerage accounts electronically, this implies that the shares will not be easily traded. The large exchanges such as NYSE and AMEX require DTC eligibility, whereas lower platforms like OTC bulletin Board and other platforms run by OTC do not need DTC eligibility. The larger United States banks and broker-dealers are DTC participants. After getting an approval from FINRA, the issuer must apply to DTC for their initial eligibility to trade. The issuer must have the relationship with a broker-dealer or any other financial institution which is a participant and will back the eligibility process. These firms are often called market makers. Along with the broker-dealer, the firm should also have a transfer agent.
The Eligibility Process
Those issuers looking forward to electronic trading must find a participant sponsor, to the DTC eligibility process, who can give in the request either when the security is first offered and distributed or at a later time for already issued and outstanding securities. Whether the security satisfies the criteria as per the requirement of DTC, is the responsibility of the participant.
After the DTC has gone through the information submitted, it will probably request an opinion from the issuer‘s securities attorney to authenticate the legal basis for eligibility. The lawyer as per DTC should not be the shareholder of security for which the legal opinion is being provided.
DTC reserves the right to endorse the securities lawyer upon whose opinion DTC is being asked to depend.
General Eligibility Requirements
There are certain criteria, which need to be fulfilled for an issue to become and remain eligible at DTC. Along with the operational criteria mentioned in Operational Arrangements, legal criteria specified in the Operational arrangement include that security must be:
(i) Issued in a transaction registered with the U.S. Securities and Exchange Commission (“SEC”) pursuant to the Securities Act of 1933, as amended (the “ 33 Act”); or
(ii) Issued in a transaction exempt from registration pursuant to a ’33 Act exemption that at the time of the request for DTC eligibility no longer involves transfer or ownership restrictions,
(iii) Eligible for resale pursuant to Rule 144A or Regulation S under the ’33 Act (and must otherwise meet DTC’s eligibility criteria)
Document requirement for the issuer
Either at the time of the initial offering or when the terms of an already eligible security are changed in a corporate action, there are some related documentations which an issuer needs to execute and deliver as per DTC’s underwriting department, including but not limited to the following:
- ·an offering document,
- ·a completed eligibility questionnaire signed by a Participant,
- ·For Book-Entry-Only (“BEO”) securities, apart from the above two documents, an issuer must provide a DTC Letter of Representation. The Letter of Representation may be a blanket letter, which is issuer precise and covers all securities by the issuer or an issuer letter of representation which is used for one time issuances only. Securities for which no physical certificates are available, and all securities are maintained by DTC “Cede & Co” account are known as Book-Entry-Only (“BEO”) Securities. Most OTC Issuer securities are not BEO.
- ·DTC may ask for a rider, which is usually required for REG S or non-U.S. issuers.
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