Electronic records are replacing paper stock certificates
Updated 5/25/2010 12:30 AM For many of us, the three most important pieces of paper in life are the birth certificate, stock certificate and the death certificate. One of those is rapidly vanishing.
The iconic symbol of capitalism and stock ownership for centuries, the paper stock certificate, is becoming more of a historic relic than a real record of ownership for investors.
"Stock certificates are on life support," says Lance Lee, founder of OneShare.com, which sells investors framed paper stock certificates. "Everything is put in place where (the industry) could just pull the plug."
The decline in paper stock certificates has been dramatic. Just 1.6 million paper stock certificates remain in the vault of the Depository Trust & Clearing Corp., a leading firm responsible for tracking stock ownership. That's down from 1.9 million last year, 8 million in 2000 and 32 million in 1990.
Reason for being evaporates
Paper stock certificates used to be the only way for investors to prove and record stock ownership. That's no longer the case, due to:
•Rapid acceptance of technology. An industry database, the Direct Registration System, has caught on that lets companies, brokers and regulators keep track of shareholders electronically. Regulators gave DRS another push last year by requiring that all major public companies be eligible to be in the system.
•Regulation allowing companies to banish paper. Companies are no longer required to provide paper certificates, and an increasing number are opting out, says Joe Clemente of the Depository Trust & Clearing Corp., or DTCC, which operates DRS. More than 420 of the 7,000-plus publicly traded securities — including names such as Visa, Intel, Tupperware, Tiffany, Sears and Chevron — don't print paper stock certificates anymore.
•Waning demand The number of investors asking for paper stock certificates continues to dwindle. Spokespeople for brokerages Charles Schwab, E-Trade, TradeKing and Zecco all say demand for paper certificates continues to drop if not vanish.
•Fees designed to discourage paper certificates. Charges and fees designed to push investors toward electronic records are rising. Many brokers charge customers $500 or more to produce a paper certificate. That's because they're passing along a fee they're charged by the DTCC, which is using the fee to coax investors to go paperless.
Cumbersome and costly
Proponents of the move to kill off stock certificates, called dematerialization, say it benefits everyone.
Paper stock certificates are cumbersome and costly for the industry to process, resulting in higher fees and slower turnaround time for transactions, says Kevin Brennan, managing director of BNY Mellon, a large transfer agent hired by companies to track their shareholders.
Bob Kerstein, who operates paper stock certificate-collecting website Scripophily.com, agrees paper stock certificates have their drawbacks. Investors who lose certificates, such as from theft or fire, must pay large fees to have them replaced.
Also, investors who lose track of certificates, either after moving or just from forgetfulness, risk forfeiting their stock as unclaimed property. Certificates are "a great piece of history, and nothing else," Kerstein says.
In some ways, it's amazing paper stock certificates still exist, says DTCC's Clemente. U.S. government debt securities are all electronic, as are mutual fund records and stock markets in most other developed nations, he says.
Resistance arises
But while the industry can't bail on paper certificates fast enough, some investors resent companies and brokerages that are making it so hard to get them.
Shirley Pullan, 83, wanted a paper Google certificate to give to grandchildren as a gift, as well as to serve as tangible evidence that she owned a piece of the search engine. Her online discount brokerage told her it would cost hundreds of dollars. "It would be nice to have (a certificate), and who wants to pay $500?" she says.
Francis Cordell, 77, says he wants to hold some of his stock on paper certificates in case the financial system is strained, so he'll have something tangible. His broker was unable to help, he says.
Such demands are why the securities industry must give investors the option to get paper certificates, says Jean Setzfand, director of financial security for AARP. "There shouldn't be a financial penalty for it," she says.
Investors willing to do some legwork can still get paper stock certificates for free, as long as the company is still issuing them, says Charlie Rossi, president of the Securities Transfer Association and an executive of Computershare, a top transfer agent.
Shareholders must first instruct their brokerage to put the shares directly in their name on the transfer agent's books. Most brokers don't charge for this, but some do. Investors must then call the transfer agent and request a paper certificate. Neither Computershare nor BNY Mellon charge for paper certificates, though smaller transfer agents do. "Certificates are still there, just less and less so," Rossi says.
Comes with artwork
Some companies say paper certificates still serve a purpose and have no plans to do away with them. Disney, famous for its stock certificate adorned with drawings of its famous characters, mails certificates to investors for no charge, spokesman Jonathan Friedland says. Disney certificates are treasured by many investors, he says. "It is relatively expensive," he says. "But it's something we do for our shareholders." Disney doesn't charge, but there is a $250 minimum investment — nearly eight shares at the stock's current $32.48 price.
But for most companies, the future will likely be paperless, OneShare's Lee says. While regulators aren't banning stock certificates, they're certainly allowing the industry to discourage them, he says.
"We're losing another touchstone to our physical existence, and a pretty one at that," he says. "It's the end of an era."
