Document Type

Article

Publication Date

5-28-2024

Abstract

This Report is written by and reflects the views of the authors. It benefited from meetings of the Task Force over four years and substantial input from its participants. It examines the infrastructure for post-settlement holding of securities in the United States. Most publicly traded equity securities and corporate and municipal bonds are held by beneficial owners (BOs) through securities accounts maintained with securities intermediaries. The registered owner of most of these securities is the nominee of The Depository Trust Company (DTC), a central securities depository and a registered clearing agency. DTC holds securities for the benefit of its participants, broker-dealers and banks that own its common stock. The participants, in turn, hold for their account holders (some of which are BOs and some are securities intermediaries). This Part One of the Report addresses several problems associated with this intermediated or “indirect” holding infrastructure. Part Two, forthcoming in the next issue of The Business Lawyer, considers plausible means of addressing these problems and the Report’s recommendation calling for an independent study of the infrastructure. Inspired in part by emerging technologies (such as distributed ledger technology, including blockchain), several commentators have called for consideration of infrastructure modifications that would provide more efficient approaches to direct holding of securities on the books of issuers or increased transparency in indirect holding. This infrastructure has served well its primary function of facilitating trading, clearance, and settlement for securities transactions and it provides flexibility and convenience for investors (BOs). That said, the Report identifies several problems that derive from the intermediated holding infrastructure. Most of the problems arise from intermediation itself—the absence of privity between BOs and issuers of securities and the various workarounds designed to overcome that absence. Principal examples are shareholder voting and the exercise of other security-holder rights, such as enforcement of bondholder rights. Some problems have been the subject of considerable study; others are seriously understudied. Part One provides another major contribution—an overview of the intermediated holding infrastructure and its relationship to securities market transactions, participants, functions, and relationships. It makes the complicated infrastructure more visible and describes in detail the intermediated infrastructure, clearing and settlement, margin lending, rehypothecation (securities lending and borrowing, repurchase agreements, and “repledge”), the SEC’s “customer protection rule,” prime brokerage, secured financing, shareholder voting and exercise of other rights, and imbalances between holdings of intermediaries and their account holders

Keywords

intermediated securities holding, financial infrastructure, securities markets, shareholder voting, fintech, beneficial ownership, intermediary risk

Publication Title

Business Lawyer

Publication Citation

79 Bus. Law. 343 (2024)

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