What are “chills and “freezes”?

June, 2012:

In our continued effort to educate the investing public about various aspects of the securities markets, we are providing the below information. Because this information is being provided for educational purposes only, it should not be relied upon as providing legal or investment advice. Moreover, it is not intended to be complete in all material respects. If you have any questions concerning the information set forth below, you should contact a qualified professional.

Occasionally a problem may arise with a company or its securities on deposit at The Depository Trust Corporation (“DTC”).  In some of those cases DTC may impose a “chill” or a “freeze” on all the company’s securities. A “chill” is a restriction placed by DTC on one or more of DTC’s services, such as limiting a DTC participant’s ability to make a deposit or withdrawal of the security at DTC. A chill may remain imposed on a security for just a few days or for an extended period of time depending upon the reasons for the chill and whether the issuer or transfer agent corrects the problem. A “freeze” is a discontinuation of all services at DTC. Freezes may last a few days or an extended period of time, depending on the reason for the freeze. If the reasons for the freeze cannot be rectified, then the security will generally be removed from DTC, and securities transactions in that security will no longer be eligible to be cleared at any registered clearing agency.

DTC imposes chills and freezes on securities for various reasons. For example, DTC may impose a chill on a security because the issuer no longer has a transfer agent to facilitate the transfer of the security or the transfer agent is not complying with DTC rules in its interactions with DTC in transferring the security. Often this type of situation is resolved within a short period of time.

Chills and freezes can be imposed on securities for more complicated reasons, such as when DTC determines that there may be a legal, regulatory, or operational problem with the issuance of the security, or the trading or clearing of transactions involving the security. For example, DTC may chill or freeze a security when DTC becomes aware or is informed by the issuer, its transfer agent, federal or state regulators, or federal or state law enforcement officials that an issuance of some or all of the issuer’s securities or transfer in those securities is in violation of state or federal law. If DTC suspects that all or a portion of its holdings of a security may not be freely transferable as is required for DTC services, it may decide to chill one or more of its services or place a freeze on all services for the security. When there is a corporate reorganization, DTC will temporarily chill the security for book-entry activities.

When DTC chills or freezes a security, it will issue a “Participant Notice” to its participants. These notices are publicly available on DTC’s website at http://www.dtcc.com/legal/imp_notices. When securities are frozen, DTC also provides optional automated notifications to its participants. These processes provide participants the ability to update their systems to automatically block future trading of affected securities, in addition to alerting participant compliance departments. DTC has information regarding these processes on its website.