Once a corporation has been vetted and approved for trading either by FINRA or by the SEC, the corporation must also submit an application to DTC for its initial eligibility to trade. If eligibility is granted, DTC will agree to hold an inventory of the corporation’s free-trading street name shares on deposit. These are the shares that will become the “float”, those shares that are free-trading AND held at DTC. There is currently no other depository that carries an inventory for clearing and settlement of publicly traded shares.
The market maker (the dealer at a brokerage firm who agrees to carry the first amount of shares in inventory on behalf of their firm) must make the initial submission for eligibility. The market maker must either be a participant of DTCC (assigned a DTC Participant Number) or use a clearing firm that is a full participant of DTC. The participant number allows the market maker/clearing firm to enter transactions for their firm into DTC’s software. For approval by DTCC, the company will have to sign the Operational Agreement with DTC. However, DTCC retains the right to deny a company the ability to use their depository without providing a reason for this denial or an appeal procedure to redress grievances or wrongs. The company can still present an appeal but the appeal will not follow a specific procedure or necessitate a response from DTCC. For this reason, before a company applies for initial eligibility, they must have a clean presentation that includes, not only the effective registration, but also can include full disclosure of the provenance of all shares that will be initially deposited as free-trading shares. Provenance means the history of the ownership of the shares presented –the age of the shares, who received them from whom, how much in money or services was exchanged for the shares, etc.
Companies that are listed on the NYSE, the AMEX (ARCA) or NASDAQ markets are already considered properly vetted by DTCC and the SEC’s willingness to make the registration effective is considered a satisfactory and clean presentation. However, those companies who trade on a non-listed market can be more problematic. (FYI, if a company is non-reporting they may not be granted initial DTC eligibility or DTC may pull already-granted eligibility at any time. These companies will rarely be allowed FAST eligibility.)
A clean presentation for a reporting OTCBB or PinkSheet company to become FAST for the first time can be very slow. Issues that will quicken the process are, a) not only being reporting but not missing or being late with any reports; b) having very few name changes or reverse splits in the last 5 years; c) having no people associated with the company that have ever been under investigation; d) having no record of being involved in a spam campaign, pump and dump scheme, or other fraudulent activities through the years that would raise AML or OFAC issues; and, e) having no record of unregistered resales at brokerages - especially among the affiliates of the company.
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