Comment Letter to the SEC

Re: Concept Release: Securities and Transactions Settlement
(Release No. 33-8398; 34-49405; IC-263846; File No. S7-13-04; RIN 3235-AJ19)

May 10, 2004

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Jonathan G. Katz, Secretary

Via e-mail: rule-comments@sec.gov

Re: Concept Release: Securities and Transactions Settlement
(Release No. 33-8398; 34-49405; IC-263846; File No. S7-13-04; RIN 3235-AJ19)

Ladies and Gentlemen:

The American Society of Corporate Secretaries, Inc. (ASCS) is a professional association founded in 1946, serving more than 4,000 corporate attorneys and other business executives who represent over 3,000 issuers. Job responsibilities of our members include working with corporate boards of directors and senior management regarding corporate governance; assuring issuer compliance with securities regulations and listing requirements; and coordinating activities with stockholders, including proxy voting for the annual meeting of stockholders and negotiation of stockholder proposals. The majority of ASCS members are attorneys. ASCS members have been actively involved with implementation and operation of the Direct Registration System ("DRS"), which has enabled many issuers to eliminate costly paperwork and offers shareholders the efficiencies of electronic registration while maintaining, if they choose, a direct relationship with the issuer.

We appreciate the opportunity to comment on the Concept Release and, in particular, Section IV thereof regarding the immobilization and dematerialization of securities certificates. We are submitting this comment letter to register our support for the efforts by the Securities and Exchange Commission (the "Commission") and other groups to reduce and seek to eliminate the use of physical securities certificates and to respond to some of the Commission's enumerated requests for comments. We note in this regard that the Securities Industry Association (SIA) is in the midst of a project to encourage immobilization and dematerialization and plans to publish an Implementation Guide for the use of issuers, transfer agents and securities firms.

It is clear from the point of view of corporate issuers that certificated securities are an obsolete concept in this era of computerization and multiple thousands, if not millions, of stockholders per issuer. Paper certificates routinely generate problems and expense far out of proportion to the number of shares or bonds they represent. We agree that some shareholders may be "attached to securities certificates", but the public and economic benefits of immobilization and dematerialization far outweigh that extremely minor consideration. Typical paper-related issues for issuers include expense of printing, delivery, safekeeping and the processing of transferred certificates; lost, stolen, destroyed and forged or altered certificates; requests for multiple certificates in small denominations; escheatment resulting from lost certificates; and problems related to dividend payments. All costs of dealing with physical certificates can be expected to rise over time, particularly as they become exception-based items unable to take advantage of newer and more efficient processes. The Commission's Release explains how the use of paper can create settlement failure and otherwise adversely affect the settlement process. We note that many U.S. Government issuers, and the mutual fund industry, have largely succeeded in eliminating certificated securities from their operations. Elimination of certificates by fiat is not available for many commercial-industrial issuers, because relevant state law in some jurisdictions (including Delaware) may still require the availability of paper certificates for requesting stockholders.

In response to your Question No. 1, both immobilization and dematerialization (as defined by the SIA, below) serve to deal with many of the problems and expense items related to certificated securities. We do favor dematerialization as an end-state goal since it will prevent a later proliferation of paper and the continuation of costly manual processes. To reach that goal, in response to your Question No. 3, issuers will need the support of several state legislatures (or Federal action pre-empting the state law) to rescind corporation code provisions that allow shareholders to receive paper certificates as a matter of right. We understand that the vast majority of states currently allow publicly traded companies to avoid the use of physical certificates, but those that require certificates upon shareholder request include Delaware. It will be extremely helpful if the Commission actively engages with the states to support those changes or acts with pre-emptive authority in the matter.

• Immobilization is any circumstance where an investor does not receive a physical certificate upon the purchase of shares or is required to physically deliver a certificate upon the sale of shares. Evidence of an investor's ownership will be maintained on the books and records of a broker/financial institution or corporate issuer. DRS and street-name ownership are both examples of book-entry ownership where securities are "in the system" and thus immobilized. Simply stated, it refers to taking certificates out of circulation at the time of any transaction.
• Dematerialization is the processes of eliminating physical certificates as a record of security ownership, or where ownership of the security exists only as an accounting record.

With regard to your Questions concerning DRS, many of our members are DRS-eligible issuers, and we believe that on balance the system works quite well. We believe that DRS should be encouraged because of the advantages it offers to issuers and investors. For issuers, these benefits include elimination of the cost of printing stock certificates and improving services for registered shareholders. For investors, the benefits of DRS include avoiding the risk that certificates will be misplaced or stolen, as well as the ability to enroll into shareholder plans without the risks or delays associated with mailing share certificates to the transfer agent. In addition to dividend reinvestment plans and direct stock purchase plans, such plans include programs designed to enable shareholders to liquidate their shares as described in Section 3(a)(4)(B)(iv)(III) of the Securities Exchange Act of 1934, as amended. In this connection, we would welcome processing rules specifically designed for book-entry transactions, as well as for dividend reinvestment and similar plans. We note that shareholders today see little practical difference between book-entry shares that are enrolled in a plan and book-entry shares that are not so enrolled, and we believe that shareholders should be able to easily and conveniently obtain the full array of shareholder services available to plan participants if they so choose. Therefore, a consistent set of processing rules would be beneficial.

We believe that another benefit of DRS is that it offers a powerful tool for shareholder communication with regard to the proxy process and otherwise. The current system for shareholder communication, including the NOBO/OBO rules, does not work well and we expect that it will work even less well in the future. The increasing volume of shareholder proxy proposals, issuer equity plan proposals and the potential for a massive increase in director election contests will strain the system and highlight weaknesses in communication, vote audit trail and related matters. Numerous commentators on the Commission's director nomination proposal have pointed out the problems with the current rules and structures for shareholder communication and the need for upgrading and modernization in ways that facilitate efficient and cost-effective issuer-shareholder communications. Issuers are unable to communicate directly with OBOs, resulting in inefficiencies and delays; further, the tabulation of votes for beneficial holders may be undermined by securities lending practices of nominee holders, causing over-voting which results in disenfranchisement of some beneficial holders. Expanded use of DRS will give issuers more transparency in the proxy process today; in the future DRS would hopefully be sufficiently scaleable that it could be used as a significant part of a revamped shareholder communication/proxy system. A robust, widely accepted book-entry system for registered holders would make registered ownership a more viable, attractive form of ownership for investors, enabling issuers to communicate directly with more of their shareholders and improving the accuracy of the proxy tabulation process.

Although DRS is gaining in acceptance, we understand that only ~750 issuers are currently eligible for DRS, predominantly issuers that became DRS eligible in conjunction with undergoing a corporate action. Nevertheless, the DRS system is in place and we favor expansion of this program rather than its replacement with some sort of new program. It is somewhat unclear if the CPSS/IOSCO Report is advocating a substitute for DRS, but we presume that DRS can at a minimum serve as the base for any expanded suite of tools supporting immobilization and dematerialization.

In response to your Question No. 8, we believe that a powerful way to expand DRS would be to implement listing requirements to require public companies to become DRS eligible. When many more issuers become DRS eligible, book-entry ownership will be much more common and this would facilitate investor and broker interest and understanding of this alternative to physical certificates. The Commission could adopt a rule that requires transfer agents for DRS-eligible issuers to issue shares in book-entry when share certificates are submitted for transfer, unless the shareholder specifically requests a certificate. Similarly, the Commission could adopt a rule requiring broker-dealers to deliver out shares of DRS-eligible issuers in certificated form only upon the investor's specific request. Additionally, the Commission might adopt a rule requiring broker-dealers and transfer agents to inform investors that they have the ability to hold securities in DRS rather than in physical form. This disclosure could be triggered whenever a shareholder requests a physical certificate or acquires an initial position in the issue through a bank/broker account. Going further, the Commission could simply mandate the use of DRS whenever a physical certificate is submitted for transfer and it could be required that any un-certificated shares remain in that state; paper would be reduced slowly as it is submitted but no new paper would be generated.

We do understand that the complete elimination of physical certificates at this time could be difficult with regard to particular types of holdings. For example, in some jurisdictions restricted stock may require use of a legended physical certificate, and stock serving as collateral may have to be physically possessed to perfect a security interest. At a broader level, some state corporation statutes, e.g., Delaware, still require that shareholders have the option to receive a certificate for their shares. However, most states and state laws do allow for dematerialization, and they can serve as ample precedent for consideration in the jurisdictions which still require physical certificates in certain cases. We do encourage the Commission to support efforts at the state level to amend state codes to allow issuers to opt out of the issuance of paper certificates if they choose to do so.

In response to your Question no. 13, we do not believe it will require a major effort to "engender public confidence in certificate-less systems". Paper holdings are a residual, minority position; the vast majority of holdings of investors are currently represented as computer entries on a bank/broker monthly statement, not to mention the bank deposits and assets that exist to their owners as computer entries. The SIA is currently preparing educational materials to encourage immobilization and dematerialization, and this and other initiatives can be employed to assist in avoiding needless investor concern about certificate-less systems. As noted above, the U.S. Government itself has largely converted to certificate-less systems without a loss of investor confidence.

In conclusion, we believe that DRS is currently working well and that its expansion appears to be an efficient and effective way to reduce the number of share certificates. The Commission can and should take a number of steps to encourage or mandate dematerialization by publicly-traded companies.

Please call the undersigned should you have questions about the comments provided in this letter.

Very truly yours,
Cary Klafter
Chair, Public Company Affairs Committee,
American Society of Corporate Secretaries

Society of Corporate Secretaries and Governance Professionals
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212-681-2000 - Fax 212-681-2005

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