Deposit At Custodian DWAC Key to Secure Electronic Transfers

Core Description

• Deposit at Custodian (DWAC) is an electronic process that moves newly issued or certificated shares between a broker and the Depository Trust Company (DTC), using a FAST-participating transfer agent.
• DWAC enables faster, more secure, and paperless transfer of securities compared to traditional physical methods, supporting market readiness and operational efficiency.
• It is commonly used for corporate actions, IPOs, follow-on offerings, and legend removals, benefiting issuers, broker-dealers, institutional, and retail investors.

Definition and Background

Deposit At Custodian, known as DWAC (Deposit/Withdrawal At Custodian), is an electronic mechanism that enables the movement of newly issued or paper-certificated shares between a broker-dealer and the Depository Trust Company (DTC). Unlike physical certificates, DWAC utilizes the FAST (Fast Automated Securities Transfer) program, managed by the issuer’s transfer agent, to maintain accurate, registered book entries.

DWAC originated from the inefficiencies and risks observed during the paper-certificate era of the mid-20th century. The paperwork crisis of the 1960s revealed the limitations of manual settlements, contributing to the formation of DTC in 1973. The FAST program was launched to reduce certificate handling, and by the 1990s, DWAC emerged to streamline deposit and withdrawal processes.

DWAC differs from the Direct Registration System (DRS). Both systems hold shares electronically on the transfer agent’s books, but DWAC is used for transactional purposes—delivering or withdrawing shares according to specific events—whereas DRS is a static electronic holding.

Currently, DWAC is crucial for expediting new share issuances, managing corporate events such as stock splits, supporting clear audit trails, and aligning transfer operations with regulatory expectations for T+1 or faster settlement cycles.

Calculation Methods and Applications

Operational Workflow

1. Initiation: A broker initiates a DWAC instruction (deposit or withdrawal), including necessary details such as CUSIP, share count, registration names, and medallion-guaranteed authorization.
2. Validation: DTC forwards the instruction to the issuer’s transfer agent, who validates the issuer’s authorization, CUSIP eligibility, and legal restrictions (such as legends).
3. Processing: After validation, the transfer agent instructs DTC to credit or debit shares to the broker’s DTC participant account using the FAST system. The client’s brokerage account is then updated.
4. Confirmation and Audit: Electronic confirmations with timestamps are issued, supporting reconciliation and audit requirements.

Typical Applications

• Public Offerings & Placements: DWAC is used to deliver newly issued, registered shares directly to investor accounts in follow-on or at-the-market (ATM) offerings.
  Example: A Nasdaq-listed biotech company completes an ATM offering and uses DWAC to distribute shares to brokers on the same day.
• Corporate Actions: Applied for stock splits, mergers, or spinoffs when additional or replacement shares must be credited to holders.
• Registered Share Conversions: Converts paper certificates or restricted shares into electronic form after legend removal and compliance checks.
• Employee Plans & DRIPs: Facilitates efficient deposit of vested RSUs or dividend reinvestment shares directly into participant accounts.

Timing, Cutoffs, and Fees

When free of legal or registration issues, DWAC instructions are typically completed within the same business day or by T+1. Processing times are governed by DTC and transfer agent cutoffs, generally in the mid- to late-afternoon Eastern Time. Fees apply, charged by brokers, transfer agents, and DTC, usually on a per-transaction basis and may include additional charges for expedited service or legend removal.

Comparison, Advantages, and Common Misconceptions

DWAC vs DRS

Key Advantages of DWAC

• Speed and Efficiency: Electronic processing avoids postal delays, enabling same-day transfer and improving market readiness, which is important for T+1 settlement.
• Lower Risk: Eliminates the chance of certificate loss, fraud, and manual operational errors.
• Auditability: Offers transparent, timestamped transaction records, which reduces reconciliation issues.
• Cost Savings: Reduces or eliminates courier, printing, and storage costs. Fewer errors result in lower administrative burdens.

Common Misconceptions

DWAC is 'Instant' and 'Risk-Free':
Actual processing times are affected by cutoffs, legal reviews, and operational factors. Errors, legends, or mismatches can cause delays.

All Shares are Eligible:
Only DTC-eligible securities serviced by FAST-participating agents are eligible. Small-cap, certain preferred, or foreign shares may not qualify.

No Fees Involved:
DWAC is efficient, but transfer agents, brokers, and DTC may still apply fees, especially in cases such as legend removals.

DRS and DWAC are Interchangeable:
These systems serve different purposes and are used in complementary ways, not as substitutes.

No Registration Issues:
Any discrepancies in account registration details (such as name, tax ID) between the client and the transfer agent can lead to rejections or regulatory delays.

Practical Guide

Step-by-Step Process for DWAC Transfers

1. Confirm Eligibility

• Ensure the security is DTC-eligible and issued in registered form.
• Confirm both your broker (for example, Longbridge) and the transfer agent support DWAC for the security.

2. Prepare Documentation

• DWAC request form (provided by your broker)
• Valid identification
• Account numbers, CUSIP, share count, and registration details
• Legal opinion or issuer approval for legend removal, if applicable

3. Submit DWAC Instruction

• Submit the complete instruction form and supporting documents to your broker.
• Indicate deposit or withdrawal, provide the correct DTC participant number, and specify your CUSIP.

4. Coordinate with the Transfer Agent and DTC

• Clear any restrictions or legends before submitting instructions.
• The transfer agent will release shares via FAST, referencing your DTC control number.

5. Monitor Progress

• Track the status using broker reference and DTC control numbers.
• Remain alert to any communication regarding mismatches or delays.

6. Reconcile Records

• After processing, verify the correct share number, cost basis, and related adjustments. Retain all confirmations for audit or tax purposes.

Case Study (Fictional Example)

An institutional investor participating in a registered direct offering instructs Longbridge to receive 10,000 newly issued shares in a technology firm via DWAC. The transfer agent verifies DTC eligibility and releases the shares through FAST. The shares are posted to Longbridge within four hours, enabling the investor to view and trade the position on the same business day. This process eliminates the risks of lost certificates, reduces courier fees, and aligns settlement with evolving T+1 cycle rules.

Resources for Learning and Improvement

• Regulatory Guidelines:

  • SEC Rule 17Ad (Transfer Agent Regulations)
  • FINRA Uniform Practice Codes
  • DTC (Depository Trust Company) Operational Arrangements

• Transfer Agent Policies and Instructions:

  • Transfer agent websites (Computershare, EQ, and others) offer client guides.
  • Public bulletins on medallion guarantees, DRS/DWAC distinctions, legend removal, and recordkeeping.

• Broker-Dealer Operations Manuals:

  • Most major brokers publish DWAC and certificate desk guidelines, covering timing and fee structures.

• Professional Literature:

  • “Securities Operations” by Michael Simmons
  • Industry primers and handbooks focusing on post-trade and custody

• Webinars, Online Courses, and Certifications:

  • DTCC Learning Center modules
  • SIFMA operational webinars
  • Investment operations professional tracks

• Case Law and Regulatory Proceedings:

  • SEC administrative proceedings archive regarding mismanagement of DWAC or restricted securities

• Glossaries and News Feeds:

  • DTCC glossary
  • SIFMA and SEC Investor.gov investment guides
  • Issuer services newsletters for processing rule updates

FAQs

What is DWAC and when is it used?

DWAC (Deposit/Withdrawal at Custodian) is an electronic process that transfers securities between transfer agents and broker-dealers via DTC. It is commonly used for new share issuances, conversions from paper certificates, and registered direct deliveries.

How is DWAC different from DRS?

DWAC is a transactional process for depositing or withdrawing shares into or from a broker's DTC account. DRS (Direct Registration System) is a continuous electronic holding with a transfer agent that does not involve a broker unless a transfer is requested.

Who initiates a DWAC and which parties are involved?

The investor’s broker usually initiates DWAC after receiving client authorization. Participants include the issuer (for authorizations), the transfer agent (who processes the transaction through FAST), DTC (as the settlement platform), and the broker (who receives or delivers the shares).

What information is necessary for a DWAC transfer?

Essential information includes the CUSIP, issuer name, share quantity, registration details, DTC participant numbers, and medallion-guaranteed endorsements (if required). For restricted stock, a legal opinion or issuer clearance is needed.

How long does a DWAC transfer take?

Most DWAC instructions are processed the same day or by T+1 if there are no complications. Delays can result from mismatched details, legal holds, registration issues, backlogs, or instructions submitted outside processing windows.

What does a DWAC transfer cost?

Fees generally include broker and transfer agent charges, DTC processing fees, and potentially rush or legend-removal fees. Fee details are outlined in broker schedules and transfer agent administrative materials.

Can restricted shares be moved via DWAC?

Yes, once any legal restrictions or legends are removed, typically upon submission of a legal opinion or issuer authorization. Otherwise, the transfer agent may reject or delay the instruction.

What happens if a DWAC transfer is rejected?

Rejection reasons include registration mismatches, incorrect DTC number, unresolved restrictions, or CUSIP errors. Resolutions involve resubmitting accurate documentation or addressing legal holds. Maintaining a clear audit trail can expedite resolution.

Conclusion

Deposit at Custodian (DWAC) has significantly reshaped how securities, particularly newly issued or formerly certificated shares, are transferred between issuers, brokers, and investors. By utilizing electronic book-entry systems and the FAST program, DWAC reduces operational risks, lowers processing costs, and supports the timely settlement of corporate actions and capital market activities. It serves as fundamental infrastructure for modern securities transfers, upholding regulatory objectives and market efficiency while offering transparency and security for all parties.

For both investors and issuers, understanding the DWAC process, documentation requirements, common challenges, and associated fees is important for effective settlement and portfolio management. Ongoing education via regulatory guidelines, broker resources, and industry literature fosters preparedness as the capital markets move toward more automated and expedited settlement environments.