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History of DRS / Book Entry Holding

Updated: Mar 9, 2023

The Direct Registration System, a service provided by DTC, is a method of transferring book-entry electronic shares off of the books of Cede and Co. and onto the books of the issuer (maintained by their transfer agent), where they will be held with the individual investor as the sole named record holder.


For a more personal and complete story, listen to Suzanne Trimbath’s explanation of the DRS origins on the NoSafeBets interview from 2021 [1].


Following the paperwork crisis on Wall Street, there was a concerted effort to transition to electronic settlement as quickly and completely as possible. While book entry had already become standardized for bonds and treasuries, there were many more moving parts with transitioning stock certificates towards a electronic system to scale. Shareholders would often keep certificates secured, like in a safe deposit box, and liquidating these shares took legwork – withdrawal, verification, and sending to a broker to bring to market.


DRS was introduced as a concept to allow for the freedom of legal ownership to remain available to regular investors, while still achieving the benefits of book entry settlement and holding. Initially, the broker/dealer segment of the finance industry was vocally against this form of ownership. Direct registration could lead to brokers losing their customer base – as it is viewed that the ease of settlement and access to liquidity are primarily what is offered by as a service by broker-dealers. Comparatively, paper stock certificate owners simply had less access to broad capital markets than they could with book entry electronic accounts via brokers.


In the 1970s, the DTC began a practice called "Immobilization" or "Dematerialization" – a process with the end goal of all paper certificates staying static and in their ownership to facilitate fast and reliable electronic settlement - a method of ownership which continues to this day [2] [3] [4] [5].

An argument still persists today that maintaining securities in beneficial ownership could be the most effective way to access market liquidity. If liquidity is considered the goal of a market, it makes sense to frame it this way, and is a fair argument. However, activists seeking to bring direct ownership to the masses view some of the abuses of beneficial ownership (such as share lending without consent and vote dilution) as justification to find a new path. Issuers are also interested in onboarding direct ownership to electronic book entry holding. The issuer knows exactly how many shares they should be, the transfer agents manage that number, having more direct contact and accountability for shareholders can help issuers track sentiment, maintain communication, and identify a price floor.

In 1986 a plan for direct and individual book-entry registration would come to the table with the name Direct Registration System – the name that eventually stuck – in initial negotiations around the Government Securities Act.


In 1991, transfer agents saw that immobilization was starting to threaten their business and rallied to exert pressure on legislators.


In 1993, some issuers started using a version of direct registration to sell shares directly to interested retail investors. These were the earliest direct stock purchase plans.


In 2008, the DTCC mandated that all U.S. equities must be "DRS Eligible". At this time, established issuers were still allowed to continue printing paper certificates. However, all newly registering issuers would be "statement only".


In 2012, the NASDAQ began requiring all of their listed companies to have a direct registration option [6] [7].


In 2017, the DTCC was able to leverage the success of electronic book entry holdings to transition to a T+2 settlement window. In 2021, the DTCC proposed shortening the settlement times from T+2 to T+1 as book entry securities continued to represent a larger proportion of the liquid market [8]. Direct registration is a powerful tool and service offered through the DTC, and has the ultimate goal of transitioning all stock certificates to book entry electronic holdings, while decreasing settlement times.

Though it works very well for long-term investors who want an ongoing and direct communication with the companies they invest with, the DRS may not be the best holding option for everyone. Investors who focus on day-trading and who play market volatility for personal gain are unlikely to prefer this style of holding. For these investors, maintaining beneficial ownership in a broker may be worth the risks and lack of direct access to the company, in exchange for access to a broader market and a liquid environment. Market entities also have their own perspectives on direct registration.


The DTCC and SEC both are interested parties in the DRS – the DTCC prefers to encourage liquidity through moving to a book entry environment, and the SEC recognizes a mandate from Congress to seek prompt settlement above everything else in order to protect investors. “Congress made findings that - the prompt and accurate clearance and settlement of securities transactions, including the transfer of registered ownership and safeguarding of securities and funds related to clearance and settlement activities, are necessary for the protection of investors and those acting on behalf of investors” (15 U.S.C. 78q–1(a)(1)(A) [9]. Meanwhile, broker-dealers do not support DRS directly. They are required to offer it as a service as a DTC partner, but the DRS works directly against their bottom line (profit incentive) on multiple fronts. Thoughts: Further sourcing for Trimbath’s timetable claims in her oral history of DRS More of a throughline and story – ended up being a history of book entry holding than a history of direct registration – more supplemental sources from Trimbath’s accounting will help with framing this.


Citations:

1. No Safe Bets: Super Hero Origin Story of the Direct Registration System, a Transcription

2. Forbes: Paper Securities Still Exist, And DTCC Is After Them - Tom Groenfeldt

3. 2013 DTCC Press Release: DTCC Proposes Steps To Move Ahead On Full Dematerialization of Physical Securities

4. 2020 DTCC White Paper: From Physical To Digital - Advancing the Dematerialization of U.S. Securities

5. 1987 Finra notice: Federal Regulation of Government Securities Brokers and Dealers Under the Government Securities Act of 1986

6. 2012 SEC Rule Change to Direct Registration Requirements

7. DTCC: Direct Registration System

8. 2021 DTCC Press Release: DTCC Proposes Approach To Shortening U.S. Settlement Cycle to T+1 Within 2 Years

9. U.S. Code § 78q–1 - National system for clearance and settlement of securities transactions

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