DTCC’s Issuer Chills: Unfreezing Sparks Debate


The stakes are high for US corporations — particularly small-cap penny stock firms — because most US investors hold their shares in the name of their broker-dealer or banks which are members of  the DTC and must follow its rules. If the DTC decides the shares are no longer depository-eligible or can’t be settled on its books, trading volume will plummet, say the issuers’ attorneys, citing the anecdotes of damage to issuer corporations that have subsequently gone out of business. To sell any shares after issuers lose out on the DTC’s services, investors have to process their trades through transfer agents of the issuer corporations — a costly and cumbersome process limited exclusively to institutional investors, say the DTC’s critics .

No one really questions DTC’s authority or rationale for chilling a stock. The DTC does have legitimate reasons, such as when it suspects shares have been deposited into the depository in violation of state or federal law or when the DTC becomes aware of an enforcement action against an issuer. “The reality is that microcap issuers lose DTC’s services for two primary reasons: illegal issuances of free-trading securities based upon flawed tradability opinions and fraudulent investor relations activity,” says Brenda Hamilton of Hamilton & Associates Law Group in Boca Raton, Fla.in a company blog. “It should come as no surprise to microcap management that DTC reviews their issuance of free trading shares since these are the securities that DTC holds in its depository under the nominee name Cede & Co.”

However, no one likes the DTC’s tactics. The DTC allegedly does not offer inform issuers and their transfer agents well in advance of a chill and give them enough of an opportunity to address its concerns, or why it thinks they deserve a chill.