The Rise and Effects of the Indirect Holding System: How Corporate America Ceded Its Shareholders to Intermediaries (2007)
The Rise and Effects of the Indirect Holding System: How Corporate America Ceded Its Shareholders to Intermediaries (2007)
Critics of the DRS movement have called us conspiracy theorists, cargo cultists, etc. Taking this as constructive criticism, I thought I would start posting some relevant scholarly papers. The following paper discusses DRS, Cede and Company, an SEC investigation, the stockholder list, shareholder voting, and the DTCC. The author, David Donald, wrote his dissertation on this topic, so his knowledge is up there with Susanne Trimbath.
The Rise and Effects of the Indirect Holding System: How Corporate America Ceded Its Shareholders to Intermediaries
David C. Donald
This paper explains how the choice of the indirect holding system for securities settlement forced U.S. issuers to cede their shareholder data to intermediaries.
Part I describes the law applicable to the transfer of certificated securities.
Part II describes how the paper-intensive process of transferring certificated securities led to a market failure in the 1960's. It further shows how the indirect holding system was seen as a temporary, second-best solution pending the dematerialization of shares and improvements in communications technology. In the mean time, the effects of separating beneficial and record ownership led to an expensive and inefficient process of shareholder communication and voting.
Part III examines this process, whose inefficiency offered service providers the profitable niche industry of assisting issuers to distribute proxy materials through and around extensive chains of intermediaries.
Part IV explains how, when law and technology had developed sufficiently to allow a return to a system of direct issuer-shareholder relationships via a direct registration system, intermediaries acted rationally to absorb DRS into the DTTC system, and continue to enjoy their central role between issuers and shareholders. This Part also demonstrates how a truly effective direct registration system could provide the transparency necessary to address problems such as "empty" voting and could arguably spread the costs of securities settlement more equitably through broader- based netting, rather than pushing them downstream.
Part V argues that although the indirect holding system and its negative effects are no longer necessary, a combination of unawareness and interest serves to perpetuate a perceived need for issuers and shareholders to cede their ownership/governance relationship to a custodian utility, which then offers to put them back into contact, for a fee.
Woah. Do u know if this paper talks about, or speculates on how large the interest is, serving the perpetuation of the perceived need for beneficial ownership via Cede and Co. (too ironic right?)?
I don’t have hard sources, but it seems very clear that basically in the 60’s, majority of ownership (80/20) of securities was via individuals. By the time the 80s came along, it flipped to institutional ownership being strong majority. Makes u wonder y the wealth gap takes off exponentially once institutions took over majority of ownership? Also, it can basically be traced that this evolution of ownership and networks of institutional middle-men was cooked up by BCG in the 60s. The beginning of BCG and the likes earning their place as some of the most powerful worst of the worst.
Also points to y one of the big 5 banks is on record basically threatening a smaller company that found an angle to making share-lending more ‘fair’ ‘transparent’ etc. “hey, it’s a good business idea, and totally legal to try to shake up the industry. But I’d have someone else start my car from now on”……I’m paraphrasing, and would have to dig to find the exact real happening.
But the point is that the interest to keep things only beneficially owned by individuals is most likely the only real reason we don’t see proper change back to individual ownership (for lack of better words). It’s my opinion that majority institutional ownership is the bread-and-butter to all financial market corruption via ‘this is what enables the club to move markets however they want whenever they want’ essentially.
Well said!
The only thing I can shed light on is the paperwork crisis of 1968, where wall street had to close every Wednesday from June-Dec that year in order to catch up on paperwork from all the trades. Some brokers started to introduce mainframe computers to help carry the load, but all the while they were losing trades, failing trades and having securities straight up stolen (approximately $400 million worth) by organized crime amongst the paperwork chaos.
So they had to come up with a more streamlined system. Unfortunately that became the central depository in 1973 rather than introducing electronic holding in direct registration.
the paperwork crisis of 1968
Please see "Section 3.2: The 'Paper Crunch.'"
wall street had to close every Wednesday from June-Dec that year in order to catch up on paperwork from all the trades.
"During the last six months of 1968 and part of 1969, the volume of failed deliveries forced the NYSE to close one day per week and then hold abbreviated trading hours in order to give members time to catch up on their paperwork." (page 12)
"During 1969, the inability of some brokerage firms to settle transactions created massive backups in deliveries, so that unperformed obligations could range from 70% to 200% of a firm's total assets. Firms were forced to cover short positions caused by missing securities by making open market purchases." (page 10)
"In order to cover such outstanding obligations, some brokers illegally used the free balances of their clients to cover obligations due to others." (page 12)
"[I]n December of 1968 McDonnell had about $9.3 million in securities that it could not place to specific owner-customers and unfulfilled deliveries of approximately $1.3 million for which it simply could not find the securities to be delivered in settlement." (page 13)
Do u know if this paper talks about, or speculates on how large the interest is,
The paper does not try to quantity the size of the interest, but please see "Section 5.2: Interest" (on page 62) for more information.
Cede and Co. (too ironic right?)
"Today, in fact, it is likely that a listed company will have only one registered shareholder, appropriately named 'Cede & Company', the nominee of the Depository Trust Company (DTC), which is a subsidiary of the Depository Trust and Clearing Company (DTCC), the entity whose group clears and settles almost all securities transactions entered into on organized markets in the United States." (page 24)
I don’t have hard sources, but it seems very clear that basically in the 60’s, majority of ownership (80/20) of securities was via individuals. By the time the 80s came along, it flipped to institutional ownership being strong majority. Makes u wonder y the wealth gap takes off exponentially once institutions took over majority of ownership?
As I recall, Jon Stewart shows a graph of the rise in the inequality of stock ownership in "How Redditors Exposed the Stock Market (2022)".
Also points to y one of the big 5 banks is on record basically threatening a smaller company that found an angle to making share-lending more ‘fair’ ‘transparent’ etc. “hey, it’s a good business idea, and totally legal to try to shake up the industry. But I’d have someone else start my car from now on”……I’m paraphrasing, and would have to dig to find the exact real happening.
Do you recall which bank this was?
It’s my opinion that majority institutional ownership is the bread-and-butter to all financial market corruption via ‘this is what enables the club to move markets however they want whenever they want’ essentially.
Yes, short selling by intermediaries is a key part of the DRSGME / WhyDRS theory.
4th paragraph under ‘Case Background’ : https://www.cohenmilstein.com/case-study/stock-loan-antitrust-litigation