DTC Chills & Locks

DTC Chills & Locks

When an issuer or its securities on deposit at The Depository Trust Company (“DTC”), experiences certain problems a chill or a freeze may be imposed on all of the issuer’s securities.

DTC chills are imposed when DTC suspects that some of an issuer’s securities may not be freely transferable as is required for DTC services. DTC chills stop new issuances and transfers of DTC eligible securities to allow time for the issuer to address DTC’s concerns and provide information or documentation necessary to alleviate those concerns. DTC chills are major inconveniences for issuers and their management.

DTC chills are restrictions placed by DTC on one or more of DTC’s services.  Some of the restrictions imposed by a DTC chill are designed to limit a DTC participant’s ability to make deposits or withdrawals of a specified issuer’s securities held at DTC. DTC chills may stay on an issuer’s securities for only a few days if the issuer or issuer’s transfer agent corrects the problem which caused the DTC chill. In other cases, a DTC chill may remain on the issuer’s securities for a long duration depending on the underlying reasons for the DTC chill.

A DTC freeze is a discontinuation of all services offered by DTC. At times a freeze may be referred to as a “global lock.”  A DTC freeze may last a few days if addressed promptly by the issuer or the issuer’s transfer agent and the matter is appropriately resolved. There are times a DTC freeze may last for an extended period of time, if DTC believes the reasons for the DTC freeze are warranted. DTC will generally remove securities subject to a DTC Freeze.  This means that securities transactions in that issuer’s security are no longer eligible for clearing at any registered clearing firm, which effectively stops all trading in the securities.

There a multitude of reasons why DTC may impose a DTC chill or DTC freeze on an issuer’s securities such as when:

  • DTC becomes aware that an issuer’s transfer of its securities may have been in violation of state or federal law.
  • DTC believes an issuer’s securities may not be eligible to be freely tradeable.
  • DTC believes an issuer’s removal of a restrictive legend on its securities was not compliant with securities laws.
  • An issuer does not have a transfer agent to facilitate transfers of their securities.
  • The issuer’s transfer agent in not complying with DTC rules, even if the issuer is not at fault.

Before DTC imposes a chill or freeze, they must be informed of a violation and DTC generally learns of violations from the issuer, issuer’s transfer agent, federal or state regulators and regulatory agencies. DTC chills and freezes can be remediated easily with the help of counsel.

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