Each day a great number of securities are transferred fluidly from one owner to the next so quickly and frequently that that in some cases it can be difficult to keep track of who actually owns them. Sure, ownership is typically recognized with a physical certificate or other form of registration, but what if a security has street name registration and is book-entry only? How can ownership be proven?
Securities Ownership Options
In the past, proving ownership of securities was as simple as flashing a certificate, but in 1968 book-entry securities first became available allowing for certificate-less trades. In1996, the Depository Trust and Clearing Corporation or DTC implemented the Direct Registration System, which allowed securities to be transferred electronically and certificate-less.
Now there are three securities ownership options: physical certificates, street name registration, and direct registration profile. Physical certificates are pretty much what their name would suggest, engraved papers that prove ownership of securities.
Street name registration is a bit more complex, because it involves securities being owned by an individual but registered in the street name of his or her broker or dealer. The real owner or beneficiary, the investor, will receive no paper certificates, but will be kept up to date on his or her securities through account statements issued by the broker or dealer. The account statements are not evidence of ownership. The shares in street name continue to be owned by the brokerage firm and/or DTC and are only “assigned” to the individual shareholder.
Direct registration profile (not to be confused with direct registration) is similar to street name registration, but an investor’s name will be directly registered on the books of a transfer agent. He or she will also receive a statement of position and account statements.
Why use street name registration?
Typically, brokerage firms and other dealers will automatically put securities in street name unless otherwise requested by an investor. The broker or dealer will then be responsible for keeping records of who is actually assigned the securities. The brokerage firm will not list the shareholder name onto the issuer’s books, but will instead list their company name since they continue to be the real owner, by law.
There are many advantages to registering securities in street name, such as the broker or dealer can easily sell the securities when they reach an agreed upon price. They will also be responsible for tracking the securities, keeping them safe, and keeping the investor informed about their status and any important developments.
There are of course drawbacks to street name registration as well. Dividend and interest payments will oftentimes be paid to the assigned shareholder at the convenience of the brokerage firm and not necessarily when earned. Also, because the actual investor’s name is not the books of the issuer, he or she may not be updated about the company whose securities they have invested in. In addition, the shares can be loaned to other entities without the knowledge of the assigned holder.
So, what happens if the brokerage firm that an investor is using goes belly up? Luckily most brokers and dealers are members of the SIPC, which will protect the securities held by their investors in the Securities Investor Protection Corporation brokerage firm’s name for up to $500,000 with a $100,000 cash limit.
This protection is great news…that is if an investor can prove that he or she is the one who actually owns the securities.
How is ownership established?
Ownership can of course be proven if an investor can show a valid engraved certificate or other proof of ownership, but because of swiftness and efficiency, currently more than 99% of securities are being held in book entry or certificate-less form, and they tend to exist only in computer records and in brokers and dealers books.
Since in general, street name registered securities have brokers or dealers listed as the owners in place of the real or beneficiary owners, the issuers will have no record of their ownership of the securities.
So, how can a real or beneficial owner of book entry only, street name securities prove ownership if the broker or dealer records are not available or are somehow destroyed? That is a tough question to answer, as many may think that the real owner could easily produce an account statement received from his or her brokerage firm to prove owner ship. Unfortunately, however, a statement is not seen as acceptable evidence by a Court of Law.
Proof of Ownership
Beneficial owners of securities, which are listed in a brokerage firm’s name can prove ownership in a court of law with the help of their broker or dealer in the following two ways: The real owner can submit a statement in writing from the recorded owner of the shares documenting that the real or beneficial owner has held the securities for a year or more or the beneficial owner can demonstrate that he or she has filed a beneficial ownership report and submitted a written letter from a brokerage or stating that he or she has held the required number of securities for a year or more.
So, ultimately, ownership of street registered, book entry shares can be proven, albeit a somewhat frustrating process. A beneficial shareholder may long for the days of engraved certificates proving ownership when going through it.