Pennaluna Prospector™ Special Report
Direct Registration of Shares - 10 facts to know

Tom Wobker
posted Sep 9, 2012

Rattled by the failures of MF Global and Peregrine Financial and jittery about the financial system, some market observers are suggesting that investors transfer stock from their brokers to company transfer agents for direct registration.

The stated goal is to foil theft or misuse of shares and to protect stock ownership in case a clearing corporation goes bust or the entire economic structure collapses.

The Direct Registration System (DRS) of Depository Trust Company allows eligible stock to be sent to the transfer agent and held there electronically in the owner's name.

If you're considering DRS, here are ten things to keep in mind. This information applies generally to most brokers who clear thorough major clearing firms, although specifics may vary.

The securities industry, its technology and government regulations are changing at breakneck speed. So before you make a decision, check with your broker for current requirements.

1. You'll probably pay a fee for each individual stock you transfer. This will cover the services of broker and clearing firm and can range widely -- from around $10 or $15 per certificate to almost $100. If the transfer agent charges for processing the transfer or for other services related to the shares, you pay that too.

2. At present, there's usually no fee to transfer stock back into your account when you want to sell it... or if you need to move it back for other reasons, as when a company drops its direct registration program or changes to a transfer agent that doesn't participate.

3. In the future, it's possible fees may be charged for return transfers. The driver: escalating costs triggered by the Patriot Act; anti-money laundering and other regulatory issues; risk management concerns; and sweeping changes in the financial industry.

These same factors have helped convince one out of every seven FINRA broker-dealers to leave the business in the past five years. They are also why it's possible you won't be able to re-deposit certain shares at all under future compliance scenarios - especially if they're low price shares (see next item).

4. If your stock is low price -- i.e. "penny stock"-- it may be difficult to deposit again in your account. In some cases it may become essentially impossible.

This could be the result of a new government initiative aimed at fraud that continues to complicate and delay deposits of low price shares. We wrote about this new SEC offensive in our Pennaluna Prospector newsletter last spring. We were concerned the government's effort to crush microcap fraudsters might wind up hurting innocent investors as well.

The impact of this new program is greater than we expected, and the future effects may be even more problematic. Difficulties are most likely if the stock trades OTC in the U.S. or in Canada on the TSX Venture Exchange or the Canadian National Stock Exchange. To read the article, visit the Resources section of our website under Special Reports or click here.

Even if your stock itself passes scrutiny and is deemed acceptable, you may be required to produce satisfactory documentation of your initial purchase or other acquisition before the re-deposit will be allowed. This again relates to anti-money laundering, anti-fraud, anti-manipulation and other compliance and risk concerns.

5. You can learn about the Direct Registration System by visiting the DTC website. Review the simplified explanation found here. (Real world operational and logistic realities are more complex.)

You can learn about the functions of transfer agents by visiting the SEC website. Basic information is here.

6. You won't be able to sell your shares while transfer is in process. This usually takes from two to ten business days, depending on variables. Ditto when you transfer back. If there are glitches along the way, it can take a lot longer. (Generally the delays we see in here involve shareholder errors in paperwork or hang ups in the transfer of Canadian stocks caused by national systems that differ slightly.)

7. Once your shares are with the agent, your broker will have no further contact with the stock and won't know its status. You will need to keep track of that yourself - including related matters like reverses, mergers, name changes, dividend payments and so on.

For estate purposes you should maintain a list of all your DRS stocks and the various transfer agents that hold them... along with contact information. This will make it easier for survivors to find all the stocks, locate and get in touch with relevant agents, learn their requirements, and send each one the necessary death-related documents.

8. Not all companies and transfer agents offer direct registration. Many do not, especially small ones. North America has several thousand publicly traded companies and over 150 transfer agents. Thus your broker probably won't know if a particular firm and its agent currently offer DRS. Best idea: contact the company yourself and ask. If they say yes, then confirm details with the transfer agent.

9. Nothing in life is absolutely safe. As with any business, you could experience service delays or other problems if a transfer agent suffers a natural disaster, business interruption, insolvency, litigation, bankruptcy, or other negative developments. So far as we know, no transfer agents have SIPC membership, and we doubt any sort of FDIC insurance would apply to those agents that are arms of banks. You may want to talk with the transfer agent about its financial stability and business continuity plan.

10. If an IRA or other tax-deferred account is involved, tax considerations arise. An IRA custodian is a bank, S&L, credit union, brokerage or other entity approved by the IRS. Transfer agents are rarely if ever certified as IRA custodians. For this reason clearing firms generally won't transfer IRA or similar tax-deferred accounts to transfer agents.

On the other hand, they will usually transfer individual stocks that are in the account. However, this can trigger a "distribution" that slaps you with unexpected taxes or penalties. Seek guidance from your tax advisor before using DRS for stock in IRA or other tax-deferred accounts - and guard against unplanned distributions.

Thanks for reading. We'll see you next time.

Sep 8, 2012

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Tom Wobker holds degrees in journalism and law from the University of Kansas. You can subscribe to the free Pennaluna Prospector newsletter here.

Founded in 1926, Pennaluna trades stocks on all U.S. and Canadian exchanges, Nasdaq, OTCBB and Pink Sheets.

Phone 800-535-5329 or visit www.pennaluna.com.

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Disclosure: Pennaluna & Company is a FINRA broker-dealer and market maker. As such, it frequently buys or sells stocks for its own account, or in order to make a market. Consequently, Pennaluna may at any time buy or sell or make a market in any stock mentioned herein, and associated persons may also buy, sell or hold such stock at any time. The firm and/or associated persons may also engage in private placements or other investment banking activities with any company mentioned. Some securities mentioned may be small-cap stocks and subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information; some may be foreign securities and subject in addition to currency, political and other risks. Mention of a security does not imply an endorsement. Comments and opinions are solely those of the writer. This publication is not investment advice; is not a research report and provides insufficient information upon which to base investment decisions; is intended solely to provide readers with information; is not a solicitation for the purchase or sale of any security; and is not intended to be nor should it be used as tax advice, which should be sought from a professional familiar with your individual financial situation. Mention of a company or stock does not in any manner constitute a recommendation, unless specifically so stated. Information is believed accurate but accuracy is not guaranteed. Any websites mentioned other than www.pennaluna.com and www.penntrade.com are not under the control of the firm and it can take no responsibility for information found on such sites.

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