Direct Registration System

An investor holds shares in book-entry form registered in her own name on the records of the transfer agent, with no certificate. She now wants the shares held in street name at her broker-dealer. What has to happen?

1. A.The transfer agent issues a physical certificate, which the customer then deposits with the firm.Wrong. Producing paper to undo a book-entry position adds the very step the system was designed to eliminate.
2. B.The firm records the shares on its stock record and notifies the transfer agent of the change in beneficial ownership.Wrong. Beneficial ownership does not change here at all; what changes is who appears as the registered holder.
3. C.The issuer cancels the book-entry position and reissues the shares to the nominee of the firm.Wrong. The issuer is not the actor, since the movement is executed between the transfer agent and the depository.
4. D.The position is moved from the transfer agent to the depository, where the firm holds it for her.Correct. That deposit is exactly the movement the transfer agent and depository link exists to perform.

Why: The Direct Registration System lets an investor be the registered holder of shares in book-entry form on the records of the transfer agent, without a certificate and without a broker-dealer holding the position. Moving such a position into street name means changing the registered holder: the shares leave the records of the transfer agent and are deposited at the depository, where the nominee of the firm becomes the registered holder and the firm carries the customer as beneficial owner. Deposit and Withdrawal at Custodian is the mechanism for that electronic movement between a transfer agent and the depository, and it works in either direction. No certificate is printed at any stage, which is the point of both arrangements.

A customer's shares are held in direct registration (book-entry) form on the transfer agent's own records, and she wants them moved into street name at her broker-dealer without any physical certificate ever being issued. What mechanism accomplishes this electronic movement?

1. A.A physical certificate must first be issued in the customer's name and then re-deposited at the broker-dealer, since no electronic mechanism exists for this kind of movement.Wrong. An electronic mechanism, DWAC, exists specifically for this movement; no physical certificate is required.
2. B.An ACATS transfer instruction, since any movement of a customer's securities between two record-keeping systems is processed through the standard account transfer system.Wrong. ACATS moves accounts between broker-dealers; DWAC is the specific mechanism for moving a position between direct registration and depository book-entry.
3. C.A Deposit/Withdrawal at Custodian (DWAC) instruction, which electronically moves the position between the transfer agent's direct registration records and the depository's book-entry system without any physical certificate ever being issued or exchanged.Correct. A DWAC instruction electronically moves the position between direct registration and depository book-entry without a physical certificate.
4. D.A wire transfer instruction directing the transfer agent to send cash to the broker-dealer equal to the shares' current market value.Wrong. This scenario involves moving the shares themselves, not converting them to cash via a wire transfer.

Why: A Deposit/Withdrawal at Custodian instruction is specifically the electronic mechanism that moves a position between a transfer agent's direct registration records and the depository's book-entry system, without ever generating or requiring a physical certificate. This is exactly the kind of movement direct registration and depository book-entry systems were built to handle entirely electronically, distinct from the account-to-account transfer process ACATS handles.