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Comment Letter to NASDAQRe: The possibility of the adoption of DRS (Direct Registration System) eligibility as a listing requirement, Concept Release on Securities and Transaction Settlement, Securities Exchange Act Release No. 49405 (March 11, 2004)March 20, 2005 To: DRScomments@nasdaq.com Subject: DRS Eligibility-your bulletin of March 7, 2005; comments of the Society of Corporate Secretaries & Governance Professionals The Society of Corporate Secretaries & Governance Professionals (the Society) is a professional association founded in 1946, serving more than 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 shareholders such as proxy voting for the annual meeting of shareholders and negotiation of shareholder proposals. This letter is submitted in response to NASDAQ's request for comment in connection with the Direct Registration System (DRS) and the possibility that NASDAQ might require DRS eligibility as a listing requirement for issuers. The Society and its membership is supportive of the adoption of DRS (Direct Registration System)eligibility as a listing requirement. The Society expressed its views in this regard in a letter dated May 10, 2004 to the SEC in response to the Commission's Concept Release on Securities and Transaction Settlement, Securities Exchange Act Rel. no. 49405(March 11, 2004): "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." The Society is also of the view that DRS is one of many tools that will assist issuers in communicating with their stockholders. In this regard, we look forward to working with NASDAQ and the SEC to take a fresh look at the NOBO-OBO rules, to consider the adoption of an "access equals delivery" structure for proxy statement delivery, and otherwise to determine whether it is now time for the national market system to support the idea that issuers should be able to know the identities of their own stockholders. Please contact the undersigned if you would like to discuss this matter in any greater detail. Society of Corporate Secretaries & Governance Professionals
Society of Corporate Secretaries and Governance Professionals membership
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