State of Affairs of Dematerialization

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AgendaAgenda

• State of Paper Certificates

• DRS• Paperless Legal Transfers• CASS/Broker Pipeline• Restricted Securities• Non-Transferable Issues• Cost Basis Reporting• Q&A

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State of paper certificatesState of paper certificates

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Physical CertificatesCost to You and Your Customers

• > $300 million a year industry wide

• Banks and brokers: > $50 million• Safekeeping, auditing, fees, escheatment, shipping,

replacing, etc.

• Investors: > $50 million • Lost and stolen: 1.2 million certs annually

• Delays to market

• Lost opportunities

• Overseas Competition

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• Certs outstanding: 300 million?

• Belgium: 50 million• Netherlands: 17 million

• DTC Vaults:• 3.8 million (1.2 non-transferable)• .6 million customer certs

• ATT: 500,000 certs still outstanding

• 85% that leave the depository return

Physical CertificatesPhysical Certificates

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Dematerialization Efforts Around the World

Europe Asia-Africa Americas In-ProgressDenmark Australia ArgentinaJapan (2010)Finland China BrazilNetherlandsFrance India Mexico BelgiumGreece Jordan USAHungary Malaysia IrelandIceland New ZealandNorway PakistanPoland SingaporeSlovenia South AfricaSweden Sri LankaSwitzerlandUkraine

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Dematerialization - Benefits

• Reduces cost/risk

• Savings can be used on more pressing matters

• Faster/less expensive processing

• More timely receipt of corporate action proceeds

• Reduction/elimination of lost assets

• More efficient estate planning

• Faster to market

• Economical solution to paper certificates

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My Advice: Go Paperless !!!

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DRS – Paper Be Gone!

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DRS – Status

• 1,100 CUSIPs

• 38 million shareholders (?)

• 40,000 transfers a month

• Issuers default to DRS statements• 45 to date

• Chevron, Microsoft, Intel, UPS, Starbucks, Metlife

• Restricted securities

• Certs are the exception

• You and Investors pay the cost

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DRS: What’s up doc?

• State legislature changes• Delaware, Missouri and Louisiana August 2005• One state/ one commonwealth to go:

• AZ• PR

• Exchange rule update• DRS as an Exchange listing requirement• Rule filing by Dec 2005

• DTC to consider defaulting all transfers to statement

• New surety program• $25 million per transaction

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DRS –To do list!

• Add functionality to Profile:• Move all full shares

• Sell fractions

• Close accounts

• Are you in DRS?

• Migrate your withdrawals to DRS statement format • Average savings of $175,000 annually

• Education

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Paperless Legal TransfersPaperless Legal Transfers

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Paperless Legal Transfers

• Its not just paper ctfs we’re trying to eliminate

• Legal documents that accompany certain transfer types, such as:• Minor becoming of age

• Trust transfers

• TOD

• Cooperative industry effort: banks/brokers, agents, and regulators

• Medallion coverage

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Paperless Legal Transfers

• Medallion signature guaranty:• signature is genuine• signer is the appropriate person• signer has legal authority

• Front-office responsible for verifying and maintaining all paper documents

• Investor benefits• Cut deposit costs:

• Average firm $50,000 per year

• 90% of all DTC transfers are eligible• Restricted transfers• Canadian agents

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Paperless Legal Transfers

•To do list:•Review your process

•Eliminate more paper laden transfers• More expensive in 2006

•Consolidate deposits•Increase participation:

• Agents

• Issuers

• Brokers

• Issuer own transfer agents

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CASS/Broker PipelineCASS/Broker Pipeline

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CASS

• Goal: Eliminate the presentment of certs to agents• Data

• Images

• Phase I:• 1Q06 deliverable

• Pre-verification

• Cost per transaction

• Decrease rejects/rework

• Phase II – sometime 2006

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Restricted SecuritiesRestricted Securities

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Restricted Securities Services

• Very often held in physical form• 300,000 certs in the depository’s vault

• Up-tick in physical processing

• New regulations governing options

• Painful to process: paperwork, opinions, regulatory filings

• Restricted Securities Services• Introduced in 2004

• Expansion in 2005

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Restricted Securities Services

• Web based engine• Tutorial – TurboTax-like

• Industry best practices

• Contact database• Forms database• Linked to DTC systems• Ability to link to:

• TAs• Issuers• Issuer’s counsel

• Web based engine• Tutorial – TurboTax-like

• Industry best practices

• Contact database• Forms database• Linked to DTC systems• Ability to link to:

• TAs• Issuers• Issuer’s counsel

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Non-Transferable Issues

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Non-Transferable issuesNon-Transferable issues

• 25,000 issues/1.2 million certs

• 6 or more years, participants can allow DTC to destroy certs• PREM function – move position to an internal DTC account

• Escrow letter

• Eliminates need to count, audit, and safekeeping certs

• 75,000 certificates destroyed• $100,000 plus a year in savings• $5. per position surcharge

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Cost Basis ReportingCost Basis Reporting

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Cost Basis: Can We Talk?

• Do you provide to investors or other customers today?

• How?

• DTC exploring providing such a service:• 1925

• All entitlements

• Web based access

• IRS accepted

• Do you provide to investors or other customers today?

• How?

• DTC exploring providing such a service:• 1925

• All entitlements

• Web based access

• IRS accepted

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http://www.dtcc.com/nomorepaper

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The mandatory Q & A session!!!

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The mandatory Q & A session!!!

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Going PaperlessThank you!!!!!!!!!!!!!!!!!!!!!!!!!!!!!