Holding shares through Direct Registration in the US

 FAQs
 

Ever since physical paper certificates largely gave way to electronic stock holding, most US investors’ shares have technically not been held in their own name. Instead – as explained in the guide to brokerage account safety – shares today are usually registered ‘in nominee’ or ‘in street name’.

This means that the legal owner and the name that appears on the register of shareholders is a nominee company and not the individual buying the shares. The buyer remains the beneficial owner with rights over the shares.

However, in many cases it is possible to hold US shares electronically in your own name – a process known as direct registration. This carries two advantages that may make it useful for some investors

The first is cost. Generally, you don’t need to pay any custodial charges, while reinvesting dividends can often be done completely free or very cheaply under what’s known as a dividend reinvestment plan (DRIP). Many firms also allow you to make one-off or regular purchases of additional shares – these are usually either free or relatively low-cost, although some plans are not actually that competitive compared with using a discount broker.

So direct registration has long appealed to long-term buy-and-hold investors who focus on minimising expenses. More recently, it’s become popular with investors concerned about the security of their investments, with some writers recently promoting it under names like “Bullet Proof Shares”.

Since the direct registration puts shares in your name, rather in street name, these investors feel that this gives them greater protection against a brokerage collapse in which client assets turn out to be missing. This concern has become much more widespread since the failure of MF Global. There is some logic to this, although you should bear in mind that stocks held in street name through a US broker will be covered by the Securities Investors Protection Corporation compensation scheme up to a limit of US$500,000.

The downside is that direct registration requires more work and for many investors will be less convenient than holding shares in street name. It’s also not available for all stocks. However, it can be done for many major and smaller stocks and this article will explain how.

Understanding transfer agents

To understand how direct registration works, it’s useful to know a bit about the way in which stock ownership is recorded.

A company that issues shares will not look after the register itself – instead it will appoint a transfer agent to do so. There are a number of different transfer agents in the US – examples include Computershare USA, Wells Fargo and American Stock Transfer. These transfer agents maintain an electronic registry of who owns the company’s shares, as well as performing other services such as processing dividend payments to shareholders.

If you hold shares in street name, the name that appears on the registry will be that of a nominee company. In most cases, this will be Cede & Co, which is a company owned by the Depository Trust Corporation (DTC). Although largely unknown to the general public, the DTC essentially acts an intermediary between brokers and transfer agents, providing record keeping and clearing services, and is involved in settling the majority of securities transactions in the US.

For more information on transfer agents and direct registration, Computershare has quite a useful overview of the system [PDF].

Making your investment

To hold shares directly, you need to have the shares recorded on the transfer agent’s books in your own name rather than Cede & Co (or another nominee company). In a few cases, you can simply sign up to invest in a company through its transfer agent, but most firms don’t offer this service to new investors.

So in most circumstances, you will need to make at least your initial investment in the stock through another route and have the shares registered in your name. One way of doing this is to buy shares through a stockbroker – where they will usually be registered in street name by default – and have them transferred into your name using a DTC service called the Direct Registration System (DRS).

Many online discount brokers offer this service and provide the relevant forms on their website. However, most will also charge you a fee – $30-50 seems to be typical – for the transfer out, on top of the dealing commission you already paid to buy the share. Traditional brokers will often charge significantly more.

Obviously, a fee like this makes routinely transferring shareholdings into your name significantly less cost-effective. You may already own shares in a company that you want to move to direct registration, in which case you may not have choice in what your broker charges – but if you’re starting from scratch, it may make sense to look for a broker that offers free or cheap transfers.

From reader feedback, there appears to be only one discount broker that offers completely free outgoing DRS transfers: Scottrade. If you know of other companies that are also free or exceptionally cheap, you can let us know through the contact form.

While few companies allow new investors to buy shares directly, many – although not all – offer existing shareholders the ability to purchase additional shares through some form of stock purchase plan. This opens up an alternative way of investing that may be more cost-effective, especially if you intend to build your holding over the long term.

Rather than buying your entire shareholding through a broker and transferring it into your name, you can purchase the minimum needed to enroll in the company’s stock purchase plan, which is often just one share. After that, you make all subsequent investments directly through the transfer agent.

You could make this initial purchase through a stockbroker and transfer it through DRS, as described above, but there are also some services catering to the DRIP investing community that are specifically intended to let you purchase a single share in a cost-effective way. These include Directinvesting.com, which is a specialist brokerage that buys a single share and registers it with the transfer agent for an overall fee of $50.

Another is First Share, which matches buyers with sellers willing to sell a single shares (note that unlike Direct Investing this is not a regulated brokerage). DRIP investors also trade shares informally over forums such as DRIP Investing.

Buying and selling under direct registration

Once you’ve asked your stockbroker to move the shares into your name under DRS, transfers typically seem to take 5-10 business days. Investing through the other types of services mentioned above may take longer before your holding is registered with the transfer agent – if you’re purchasing single shares from other individuals, it will depend how quick they are.

Once the shares are registered in your name, you will be able to enroll in the company’s stock purchase plan (where the company offers these) and begin making additional purchases and reinvesting dividends through the transfer agent. Usually purchases can be done online through the transfer agent’s website.

The fees for subsequent investments will vary by company. The transfer agent websites will usually list charges for each company they represent. In general, reinvesting dividends through a dividend reinvestment plan (DRIP) is usually free or very cheap. One-off or regular cash stock purchases – often known as a direct stock purchase plans (DSPP) or a direct investment plans (DIP) – may be free or relatively cheap, although some are more expensive.

The limited number of plans that allow you to purchase your initial share from the transfer agent are often – though not always – more expensive than others. (This is often referred to as direct enrollment (DE) or a direct initial purchase plan (DIPP) – although confusingly, DSPP and DIP may be used to describe these as well.) These higher fees may apply for the initial enrollment, subsequent purchases and dividend reinvestment – so if your goal with direct investment is lower long-term costs, it’s worth checking the fees for a company’s plan carefully before making your first purchase.

When you come to sell, this can usually be done through the transfer agent – either on a same day basis or as part of a cheaper scheduled bulk transaction on specific days in the month. Alternatively, you can transfer the shares back into a stockbroker’s account – for which neither the transfer agent nor the brokerage will usually charge – and sell them through that.

Holding shares through direct registration should be possible for non-residents as well as US residents, but getting set up will require more work. You will need to open a brokerage account in the US to make the initial purchase  – firms overseas won’t offer transfers out through DRS. Making payments to the transfer agent – and receiving credits for sales – without a US bank account is also likely to be more expensive and awkward.