IN THE MONEY: DTC Asks SEC To Formally Halt Cos' Exit
By CAROL S. REMOND
A Dow Jones Newswires Column
NEW YORK -- The Depository Trust Co., or DTC, has asked the Securities and Exchange Commission to formalize DTC's recently stated position that shareholders, not companies, can decide whether to hold shares in electronic form or in paper certificates.
DTC, which manages a global electronic clearing and settlement system, said in late January that it would no longer allow small companies to exit its electronic or book-entry clearing system.
A few development-stage companies have said they want to exit DTC and move back to an old fashion, and less liquid, system that requires physical delivery of paper certificates to settle securities trades.
These companies are accusing market makers, brokers and other investors of using the electronic delivery and settlement mechanism to illegally short sell their shares. So far six companies were allowed to exit DTC before the depository decided that shareholders, not companies, could make the decision to move to physical delivery.
DTC's request to the SEC was published in the Federal Register on Feb. 21. Under the Securities and Exchange Act of 1934, interested parties have 31 days within which to comment on the proposed rule. But the SEC may decide to extend that comment period to 90 days. It's difficult to predict when the SEC will make a decision on the matter since the comment period can be re-triggered by any amendment to the original proposal. A spokesman for the SEC declined to comment.
The move by small companies to exit DTC contrasts sharply with global efforts to streamline securities trade clearing and settlement and do away with some of the costs associated with paper certificates.
Dan Michaelis, a spokesman for Wall Street's main trade group, the Securities Industry Association, wasn't immediately able to comment on the new proposal.
But previously commenting on the matter, Michaelis had told Dow Jones that "The industry is trying to move away from certificates all together" and that the SIA sees electronic clearing as a key element in streamlining the settlement process.
A marketing firm called Investor Communications International, or ICI, represents a number of companies that have either exited or expressed their desire to exit DTC.
"These companies are opting out of DTC's system to combat the naked short selling abuses made possible by the electronic system, which is flawed and allows (billions of dollars) in trading abuses to occur," ICI said in a press release Monday.
Among the companies represented by ICI is GeneMax Corp. (GMXX ) of Blaine, Wash. GeneMax has been the subject of three "In The Money" columns. Those columns questioned whether insiders would benefit most from limits on short selling and GeneMax's connection to consultant ICI.
Last month, Denver-based Global Securities Transfer Inc., a transfer agent representing a number of the companies that either exited or said they would exit DTC, filed a lawsuit against DTC to protect its clients' right to exit the depository system.
Perhaps strengthening the interconnections between ICI, Global and the clients both firms represent, recent filings with the SEC show that an offshore firm called Newport Capital Corp. was one of three new entities taking equity positions in Global.
SEC filings by Vega Atlantic Corp. (VATL), a publicly traded company represented by ICI and a client of Global, show an individual named Brent Pierce as president, secretary and a director of Newport. A Brent Pierce was identified in a December 2002 SEC filing as president of ICI.
Representatives for ICI were not immediately available for comment.
Following its decision to not allow companies to exit its electronic clearing system, DTC warned of potential settlement delays for companies that want out but won't be allowed to exit. Specifically , DTC told its participants to consider "increased risk that may be associated with potential rejections or deposits, delays in withdrawal, etc., until a resolution is reached."
The warning may have lead some companies to reconsider their decision to exit.
DTC notices to its participants in February show that four companies backtracked from their earlier intention to exit DTC and agreed to have their shares continue to clear and settle through DTC. DTC identified those companies as: Nutek Inc. (NUTK); Nutra Pharma Corp. (NPHC); ITIS Holdings Inc. (ITHH) and Ameri-Dream Entertainment Inc. (AMDR).
By Carol S. Remond; Dow Jones News; 201 938 2074; carol.remond@dowjones.com
Updated March 3, 2003 3:29 p.m. EST |
