Street Name Registration: An Antiquated Idea

This post comes to us from James McRitchie, Editor of CorpGov.net and Glyn Holton, Executive Director, United States Proxy Exchange.

“Street name registration” largely took root under emergency conditions stemming from a paperwork crisis during the 1960s, before networked computers were ubiquitous in trading markets. Immobilizing stock and registering it in the name Cede &Co., which was presumed by many to a temporary measure, now undermines our ownership culture.

Just as poker chips allow us to play under rules that often favor the house, those holding “security entitlements,” instead of registered stock, do not acquire the rights of real shareowners.

Street name registration, and the costs associated with shareowners learning each other’s identity, escalates the cost of proxy solicitations to hundreds of thousands of dollars—and that exorbitant cost is why entrenched boards routinely run unopposed. Eliminating street name registration, in favor of a direct registration system (DRS), could bring the cost of proxy solicitation down to a few thousand dollars. That could have a bigger impact on shareowner rights than the SEC’s proposed proxy access initiative.

Because DRS will facilitate corporation-shareholder and shareholder-shareholder communications, the volume of such communication is likely to increase. As this happens, appropriate steps should be taken to ensure communications are presented in a manner that is intelligible to and convenient for average investors. For example, shareholders have long sought integrated proxy solicitations that combine materials from all parties in a contested election. DRS would facilitate this.

An increased volume of communications would go hand-in-hand with an increase in the number of contested elections or issues. As average investors realize they were being offered opportunities to make real decisions, retail shareholder participation in corporate elections will likely rise. To further enhance this trend, technology and policies can allow shareholders to customize their participation, opting out of some types of communication, and controlling the form of media and style of presentation of others, much as users customize some news websites to deliver only the types of news that interest them.

However, it is key that legally vague “security entitlements” give way to real shareownership. That would help investors to think like owners with rights that would be better protected. SEC laws and regulations are written to protect shareholders, not those with security entitlements.

For example, Broadridge routinely interprets requirements that apply to proxies as not applicable to their “voter information forms.” Counting blank votes for management, with only a small font warning on the ProxyVote screen, and summarizing resolutions so voters can’t even guess the subject, are practices that would end with DRS and the use of actual proxies.

CorpGov.net and the United States Proxy Exchange have started a petition to the SEC to end “street name registration”, readers’ participation or comments are invited. More information is available here.

Both comments and trackbacks are currently closed.

2 Comments

  1. Robert Dresser
    Posted Saturday, January 30, 2010 at 9:43 am | Permalink

    It has always been my understanding that the real impediment to DRS, rather than street name registration, was that the brokerages houses used “my” securities as capital and thus, in the “good old day” they could lend against them and make 3% on the spread. More than one broker claims my understanding is wrong now, even if it was right years ago. Could anyone clarify this for me?

  2. Eleanor Pratt
    Posted Wednesday, February 2, 2011 at 12:21 pm | Permalink

    On 10/15/10, my broker reported a dividend from Occidental Petroleum as “payment in lieu.” On 2010 IRS form 1099 – MISC it is on line 8 as “substitute payment in lieu of dividends…” and instructs me to include it on the “other income” line of form 1040. Broker indicated that on 10/15/10 there were fewer shares held by its “…custodian than what were necessary to to collect a full dividend amount due for all client long positions.” So it assigns payments on the basis of a lottery process, and that resulted in my account being selected. So am I correct in believing that the “custodian” does not hold share-for-share each one of the shares held by the brokers customers? I’m shocked!

One Trackback

  1. […] (see also, Co-Filers Wanted on Petition to Eliminate Street Name Registration, 1/13/10 and Street Name Registration: An Antiquated Idea, HLS Forum on Corporate Governance and Financial Regulation, 1/30/2010) More important, Fried […]

  • Subscribe or Follow

  • Supported By:

  • Program on Corporate Governance Advisory Board

  • Programs Faculty & Senior Fellows