Critics of the DRS movement have called us conspiracy theorists, cargo cultists, etc. Taking this as constructive criticism, I thought I would start posting some relevant scholarly papers. The following paper discusses DRS, Cede and Company, an SEC investigation, the stockholder list, shareholder voting, and the DTCC. The author, David Donald, wrote his dissertation on this topic, so his knowledge is up there with Susanne Trimbath.

The Rise and Effects of the Indirect Holding System: How Corporate America Ceded Its Shareholders to Intermediaries

David C. Donald

This paper explains how the choice of the indirect holding system for securities settlement forced U.S. issuers to cede their shareholder data to intermediaries.

Part I describes the law applicable to the transfer of certificated securities.

Part II describes how the paper-intensive process of transferring certificated securities led to a market failure in the 1960’s. It further shows how the indirect holding system was seen as a temporary, second-best solution pending the dematerialization of shares and improvements in communications technology. In the mean time, the effects of separating beneficial and record ownership led to an expensive and inefficient process of shareholder communication and voting.

Part III examines this process, whose inefficiency offered service providers the profitable niche industry of assisting issuers to distribute proxy materials through and around extensive chains of intermediaries.

Part IV explains how, when law and technology had developed sufficiently to allow a return to a system of direct issuer-shareholder relationships via a direct registration system, intermediaries acted rationally to absorb DRS into the DTTC system, and continue to enjoy their central role between issuers and shareholders. This Part also demonstrates how a truly effective direct registration system could provide the transparency necessary to address problems such as “empty” voting and could arguably spread the costs of securities settlement more equitably through broader- based netting, rather than pushing them downstream.

Part V argues that although the indirect holding system and its negative effects are no longer necessary, a combination of unawareness and interest serves to perpetuate a perceived need for issuers and shareholders to cede their ownership/governance relationship to a custodian utility, which then offers to put them back into contact, for a fee.

Mirror on diyhpl.us

Mirror on publikationen.ub.uni-frankfurt.de

Mirror or papers.ssrn.com