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Saturday, 12/10/2011 2:25:43 PM

Saturday, December 10, 2011 2:25:43 PM

Post# of 2684
How I removed my securities from the control of my broker and their holding bank
http://www.siliconinvestor.com/readmsg.aspx?msgid=27816576

I called them and said, "I want my securities out of street name and direct registered with the issuer or their transfer agent." It was that easy. There was no fee. My other broker (a well-known online discount broker) has a "Direct Registration Request" form that is a one-page document that must be submitted. Still, pretty easy and no fee. There is also no fee to transfer the securities back to my broker to sell (other than their normal commission). Isn't that a revolutionary idea? My broker is now my agent to buy or sell securities...not a bank that holds them, lends them out for shorting, uses them for collateral on transactions I have no idea about, re-hypothecates, hyper-hypothecates, etc.

If you have not heard of direct registration (I hadn't either before this week), then I encourage you to do some research. Start here to understand the three ways to hold securities:
http://www.sec.gov/investor/pubs/holdsec.htm

By googling direct registration I see Jim Sinclair has been advocating this for years but I guess it never clicked with me. I thought direct registration meant that I would have to take delivery of a certificate (a pain in the butt; I have dealt with that before) but that is not the case. Let me make this clear so everyone can understand. YOU CAN GET YOUR SECURITIES COMPLETELY AWAY FROM YOUR BROKER AND THEIR HOLDING BANK/CLEARING HOUSES WITHOUT THE HASSLE OF TAKING DELIVERY OF A STOCK CERTIFICATE.

How does this work? Let me use the example of GORO which is one of the securities I own. Its transfer agent is a company called Computershare. I called Computershare and talked to a nice guy there who walked me through the process. By asking my broker to direct register my GORO security, my broker contacts Computershare and they do their thing which results in GORO transferring out of my brokerage account (the securities in which are actually held by a different larger company called National Financial, which is owned by an even larger investment bank Fidelity) and Computershare sends me a statement showing ownership of the securities. Now at this point you are thinking, well now I'm just relying on Computershare instead of National Financial to secure my assets but that is actually not the case. All Computershare does is direct register my name "AceofKY" (actually my real name) on the shareholder register of GORO - a "book entry." If you've ever read an annual report and wondered how a billion dollar market cap company like GORO only has like 90 registered shareholders, the reason is that most people hold their securities in the "Street Name" of their brokerage's holding bank rather than direct registered or certificated to themself. Computershare is just the transfer agent for GORO. They can be fired at any time and GORO can hire a new transfer agent. Computershare cannot loan out my securities or use them as collateral because they don't have them to loan out. My securities are just a book entry on GORO's ledger. I get dividends directly from GORO (or their agent) rather than than getting them from my broker. When I want to sell, Computershare merely pulls me off of the ledger and transfers the securities to the brokerage of my choice.

The downside to this is that this stuff doesn't happen instantly. Traders wouldn't want to direct register because they want to be able to sell their securities immediately at any time. I'm an investor and don't care about that. It takes me weeks or months to decide to sell a security in the first place. I care more about the security of my assets rather than the ability to instantaneously sell them. Another argument could be made that having a certificate is safer. I don't think that is the case. If your certificate doesn't match up to the company's ledger, you're in the same boat as having a statement that doesn't match up to the company's ledger. Mistakes can be made in either case, and at least this way you don't have to worry about losing the certificate. The direct registration process basically gets rid of the need to use paper in a world that is electronic; the same way that my business uses solely email now instead of mailing out hardcopy letters.

Now here's the bad news: I haven't figured out a way to direct register securities held in a custodial IRA account. I have several IRA accounts and the custodians have told me that they will not be the custodian unless those assets are held in street name. I have made a couple calls and haven't yet found a custodian who will do this (and I understand the problem; how can they keep the IRS reporting straight if they don't control the assets?) If anyone knows of a custodian who will handle an IRA without controlling the assets, let me know. Computershare told me that they don't perform this service. I'm investigating the potential of an LLC held in a self-directed IRA but haven't come to any conclusions yet. I considered distributing the money out early but the tax and penalty consequences are just massive.

I also called SIPC this week and talked to a very nice lady in the legal department who walked me thru the process of what would happen if one of my brokerages failed. There is no way to get "first in line" for SIPC reimbursement. IRA/custodial accounts or individual cash accounts get no special treatment over margin accounts, etc. When the investment bank or brokerage fails, you submit a claim form with the securities that you are missing (usually the accounts are transferred to a different broker somewhat quickly, and when there is no theft or mismanagement usually all the securities and segragated customer cash is intact and shows up at the other broker in your new account). Your claim form is then compared to the failed brokerage's records and THE ASSUMPTION IS THAT THE BROKER'S RECORDS ARE CORRECT. This is very important as we've all heard that MF Global's records were in bad shape. YOU BETTER BE PRINTING OFF/SAVING YOUR MONTHLY STATEMENTS AND TRANSACTION REPORTS FROM YOUR ONLINE BROKERAGE if they don't mail these to you. If your claim matches the broker's records then SIPC replaces the missing securities and cash up to $500k. Funds are distributed pro rata above $500k depending on how much is recovered. If your claim does not match the broker's records...who knows what will happen? It's not like they keep paper records any more. I did not ask what happens if the CEO changes the password on the database just after he electronically shifts the cash to an account overseas and gets on his private jet because that just scares the hell out of me and I don't want to think about it.

The SIPC has a reserve account of about $1 billion to handle claims and replace missing securities. I asked her what happens if the claims result in more than $1 billion missing (MF Global alone may exceed that!) She said she believes the SIPC can borrow money from the U.S. Treasury. I did not ask her what would happen if the Treasury did not have enough money or if an act of Congress is required to appropriate money for this purpose.

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