What are the commonly cited benefits of beneficial ownership for investors and companies?

• Convenient access to trading (through websites and apps).

• Low, or no transaction fees and account fees.

• Protection against brokerage insolvency through SIPC Insurance [1].

• Trade quickly without waiting for T+2 settlement for securities or for cash.

• Semi-anonymity for larger individual investors (only their broker knows their identity).

• Ability of investors to use their stock as collateral to borrow against in a margin loan [2].

• Allows for the holding of uninvested cash [1].

 

What are the downsides to beneficial ownership for investors and companies?

• Dilution of the float through stock lending and short selling.

• Securities losing value due to float dilution from share lending and shorting.

• Vote dilution makes gauging shareholder sentiment difficult for the issuer.

• Issuers do not have access to shareholder information for beneficially owned shares.

• Shareholder proposals require signoff by legal record holders (not beneficial owners).

• 401ks and pensions are used for securities lending and collateral.

• Securities can be moved to position close if clearing agents and brokers choose to do so.

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How does DRS benefit the investor?

• No possibility of failures to deliver, allowing for true price discovery.

• Shares held within the Direct Registration System cannot be lent out.

• Directly cast votes to the issuer with no interference. One share always equals one vote.

• Direct line of communication with the company.

• Submit shareholder proposals alone (if ownership duration and share quantity requirements are met).

• Transfer agent or broker insolvency does not impact ownership positions.

• Dividends, stock splits, and interest payments are processed directly with no delay [3].

• Shareholders receive annual and other reports, dividends, proxies, and other communications directly from the company [3].

• Securities can be still purchased even when the same securities have been moved to position close only (PCO) by other brokers or cleaning agents. There is an exception when a “chill” or “freeze” is placed on a security. [4]

• Shareholders receive all the benefits of paper certificates without the cost or risk [5].

 

How does DRS benefit the company?

• No possibility of failures to deliver, allowing for true price discovery.

• True price discovery ensures a cost of capital that reflects corporate financial status, rather than an NBBO that does not reflect supply/demand for shares.

• Reduces the cost of corporate actions [5].

• Transparency shared from the transfer agent prevents over-voting, allowing for proper corporate governance.

• Direct communication with long-term investors.

• More long-term shareholders helps to reduce negative price volatility.

• Protection against abusive short selling and over-lending.

• Ability to see shareholder names, positions, and contact information (demographic information), allowing for a more direct and mutually supportive relationship between issuers and investors.

• Simplifies and streamlines share ownership and investor relations.