Direct Holding System - New Direct Holding System

New Direct Holding System

In the 1990s, the U.S. Securities and Exchange Commission (SEC) working with the securities industry, developed a new form of modern, "direct holding system" that would allow both the speedy settlement of securities transactions and communication between shareholders and their companies. This new system was a type of book-entry direct registration system (DRS) operated by transfer agents. This concept would allow any retail investor who wants his or her securities to be registered directly on the books of the issuer, but does not necessarily want to receive a certificate, to register those securities in book-entry form directly on the books of the issuer. The DRS concept has been slow to develop for two reasons. First, many investors do not understand that if they give up paper certificates while joining a DRS, this will return them to the status of direct shareholders of the issuer rather than just customers of a broker (who is the registered shareholder in the eyes of the issuer), and second, once brokers and banks had been inserted as the "indispensable" middlemen between shareholders and issuers, they were not eager to surrender this privileged position of control. As a result, one version of the "direct holding system" is an inefficient relic of the past and a modern DRS form of direct holding remains for most shareholders an unrealized thing of the future.

In a system that used paper certificates for securities, the doctrine of lex loci rei sitae (the law of the place of location of the securities) was applied to determine the validity of certain rights in or transfers of securities. In the case of bearer securities, this is taken to be the law of the jurisdiction where the certificates actually are (e.g., in a pledge, where the recipient of the collateral takes possession of the securities certificate at the time of transfer). In the case of registered securities, the lex loci rei sitae is either the law of the issuer's jurisdiction or the law of the jurisdiction where the securities records of the issuer or its official recordholder are located at the time of transfer. In a system in which securities are mostly held indirectly through brokers and banks (as discussed above) or in which securities are evidenced mainly on accounts (referred to as "dematerialization") rather than by certificates, an alternative rule of "the law of the relevant intermediary" has come to be used. According to this rule, the law chosen in the account agreement with the financial institution that holds the account in which the securities are evidenced or the place where the office of the intermediary with which the account holder normally deals is the law used. This is the technique used in the Hague Convention on The Law Applicable to Certain Rights in Respect of Securities Held with an Intermediary, and also used in the Article 8, "Investment Securities" of the United States Uniform Commercial Code. The advantages of this rule for international financial transactions is that wherever securities are located or regardless of how many offices and branches a financial institution has, persons dealing in the securities can know the law that will govern a transaction such as a sale, a pledge or a loan of securities.