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Another problem with street-name registration is that it separates the stockholder from his company. His dividend check bears the name of his broker instead of his company, and the receipt of reports and notices is often haphazard.

The certificate will never be completely immobilized so long as an individual can obtain shares registered in his own name. For the reasons stated above, a massive move to street-name registration does not appear feasible. The maintenance of stockholder records, preparation of information returns for taxing authorities, mailing of stockholder notices and reports, receiving of conversions and subscriptions, and the disbursing of dividends are best left to that organization which is equipped to handle them, the transfer agent. The transfer agent can best perform these functions when he deals directly with the individual stockholder rather than through a chain of broker and depository intermediaries. What is needed is a solution which combines the advantages of registration in one's own name with the immobilization of the certificate offered by a central depository system. As other writers have suggested, the combination of the transfer agent and depository functions into a single organization appears to be the answer.

At some future time the brokerage industry should be using a locked-in trade system which will connect the brokers, exchanges, over-the-counter markets, clearing houses, and depositories into a unified system. The next step would be to connect the transfer agents to this system to permit the automatic entry of trades into the stockholders' registers to effect the transfer of ownership. When this step occurs CCS, and the various regional depositories would deposit their shares with the transfer agents. The central depositories would no longer be required to make the bookkeeping transfer of shares between depository members. However, CCS and its regional counterparts might continue to exist as message switching centers between the banks, brokers, and exchanges on the one hand and the transfer agent depositories on the other. Very possibly these central depositories would involve into the processing centers for the locked-in trade system in each of their respective regional markets.

Next, the individual investors who hold certificates in their own names would surrender them to the transfer agent depository which would issue them receipts or confirmations. Alternatively, on a specified date all certificates could be declared void. The stockholders would continue to receive confirmations periodically and also every time an entry is made to their account.

At this point the stock certificate would be completely immobilized.

The transfer agent depositories would then cancel all certificates, and we would enter the "certificateless society.

To prepare the way for the transfer agent depository, now is the time to offer stockholders the option of leaving their shares with the agent. In fact, in such cases the agent would not even go through the formality of issuing shares. Practically all mutual funds presently offer their shareholders this option. Several arragements now exist which allow shareholders of industrial or commercial corporations to receive their dividends in shares instead of cash. Credit of dividend shares, even fractional shares, to a certificateless account on a computerized stockholder register would be a simple matter.

The use of the transfer agent in this limited, depository role will help reduce the flow of certiicates, but until the lockedin trade system is implemented an assignment form will be required to effect transfers upon sale. Such a form executed by the owner would have to follow the same route as an endorsed certificate in the present system. We suggest that the transfer agents and exchanges jointly develop a system which will permit the shareholder to leave his shares with the agent. The immediate advantages are:


Elimination of certificates.


Education of the investor to accept certificateless ownership.

3. Movement of transfer agent systems a step closer to the ultimate

transfer agent depository concept. The Effect of the "certificateless Society" on the Profits of Banks

How would the move to the "certificateless society" affect the profits of the banks? Three points in time should be considered the present, the time of full immobilization of the certificate, and the certificateless society - and three sources of revenue

the transfer agent, registrar, and custodian fees.

Profit and Loss at Present

Many bankers regard the corporate agency department as a necessary evil. In the best of times it may be modestly profitable, but in periods of high trading volume, the transfer process, which depends on manually prepared input even in the most advanced systems, gets overloaded, turnaround time lengthens, clients complain about service, competent additional staff cannot be found, productivity rates fall, overtime pay escalates, base wages rise, errors increase, correction time climbs, and losses mount.

Although there is a trend in banking to make each service pay for itself, many bankers still evaluate the transfer agent function as but one part of the total services offered corporate

customers. They argue that the transfer department helps cement the relationship between the bank and its customer and helps maintain collateral business such as borrowing and deposits. Aside from the actual transfer process itself, many of the other services performed by transfer agents lend themselves well to automation using the computerized stockholder register to provide the output. They are:


Preparation and certification of stockholder lists.


Payment of dividends.


Preparing mailing labels or envelopes for notices, proxies and



Preparation of machine readable forms (usually punched cards)

to effect conversions, subscriptions, and fractional shares.

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6. Preparation of information returns for taxing authorities. All of these services are generally charged for on a per item basis, and they are usually profitable when costed as byproducts. As such they contribute toward overhead. They are, however, all dependent upon the existence of the stockholder register, and the share transfers which keep the register current cause the red ink. Given the annual account maintenance fees and dividend payment fees the transfer function would probably break even, if few or no transfers were made. Add the revenue from other fees, again assuming low transfer activity, and most agents would probably make money on fully allocated costs. In periods of high activity the agent loses out-of-pocket on every transfer he makes.

As to the other sources of bank revenue discussed here, the registrar function is profitable and the greater the volume, the greater the profits. Custodian services are also generally profitable. Profit and Loss under Immobilization of the Certificate

Immobilization of the certificate will substantially reduce the number of share transfers on the books of the transfer agents since most transfers would be made on the books of central depository systems. Most, if not all, transfer agents incur losses out-of-pocket in periods of heavy trading volume, but as volume decreases, errors and overtime also decrease. At these lower volumes all transfer agents will improve their operating margins and some will make profits. To the extent that immobilization increases the use of street-name registration, fees for account maintenance, dividend paying, stockholder lists, etc., which are charged per unit will decline; however, these losses of revenue will probably be more than offset by reductions in transfer losses resulting from decreased volume.

The immobilization of the certificate will naturally reduce the work of the registrar. This reduction will hurt the banks financially since the registrar function is one of the few which is clearly profitable. Custodian fees will probably not be affected because even though the certificates will be immobilized the basic record keeping of receipts, issues and position and the dividend servicing will remain. To the extent that present fee structures are maintained and immobilization reduces the cost of certificate handling and storage, profit margins will increase. Correspondent banks which choose to immobilize their holdings by using one of the clearing house banks as their custodian will experience increased costs to the extent that custodian fees charged them are greater than savings realized through elimination of certificate storage and handling.

Profit and Loss in the certificateless Society

Elimination of the certificate will switch the transfer of shares from the central depository back to the transfer agent. Accordingly, revenue from transfer fees will increase. To the extent that stockholders switch from street to own-name registration revenue for account maintanance, dividend paying, stockholder lists, etc., will also increase. For those transfer agents whose strockholder registers are now on a computer, the switch to a locked-in trade system should not be extremely difficult. In fact, they should be able to reduce their file sizes and simplify the system since records will no longer be kept at the certificate level. The greatest cost saving will be the elimination of transfer clerks. The total staff of some agents is presently as high as 1,500. However, many clerks will already have been released because of the immobilization of certificates.

It is unlikely that many companies which presently maintain one or more co-transfer agents will continue to do so. Only the primary agent, generally the one who is the dividend paying agent and who maintains the stockholder register, would remain. The Co-transfer agents would be unnecessary since their reason for existence, to speed a transfer process based on physical movement of certificates, will no longer remain. The primary agents will be connected to the locked-in trade system by wire.

The automation of the transfer function using the locked-in trade concept may well make the stock transfer departments profitable at any foreseeable level of trading volume. The automated system will have high fixed costs, so the greater the trading volume, the greater the profits. Present red ink has resulted from the inability or unwillingness of banks to pass on to customers the high costs caused

heavy trading activity and by the inescapably manual nature of present systems. Inescapable, because the certificate in its present form does not permit automation. Wire transmission of transfer instructions to update computerized stockholder registers should result in significant reductions in direct unit costs of transfers.

How profitable the transfer function will become also depends on the amount of fixed costs for software, equipment, and systems design which must be recovered.

The registrar function as it is today would cease. Some form of post-audit should still be required, but it could be performed by the transfer agent within the system, provided that proper controls and independence were established. Complete loss of the registrar function would hurt the banks financially. However, a fee could certainly be justified under the new system for what would in effect be a continual audit of the computerized stockholder register.

COregistrars, like co-transfer agents, will disappear.

Much as at the immobilized stage, custodian fees will not be affected, for the basic record keeping of receipts, issues, and position and the dividend servicing will remain. However, those banks which are custodians for the central depository system will lose this source of revenue. They will also lose revenues from the storage of the holdings of correspondent banks which are participating in the depository system through them. These correspondents will now deal directly with the transfer agents. Accordingly, their profits will increase by the savings they realize through no longer having to pay custodian fees.

The Machine Readable Certificate

The North American Rockwell Report, the American Bankers Association, and the New York Stock Exchange all advocate the use of man and machine readable stock certificates. What form these certificates will take is uncertain, but what is fairly sure is that some form of machine readable certificate will be developed and implemented.

The time required to implement this system will be determined by the individual times required for the following general steps:

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Procure the equipment to both produce and read certificates,


Integrate this system into the existing back-office, clearing,

and transfer flow, and

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The preceding steps are not mutually exclusive. Clearing the legal barriers may well be the most time-consuming part of the effort. North American Rockwell's most optimistic estimate is that

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