WHO WATCHES THE WATCHERS?
to the regulation of the broker-customer relationship. For example,
does not require securities firms to inform investors of the valueof a broadly diversified, low turnover strategy requiring relatively littlefirm-specific data. Nor does it require securities firms to divulge that theirinvestment advice generally yields returns no better than random stock picking.
Moreover, the disclosure principle does not require that a secu-rities firm disclose to the investor information about the reliability of thefirm itself.This last piece of neglected information is especially important. Se-curities firms not only recommend and sell securities, they also control thesecurities that investors own. When an investor purchases securities, theyare generally not held in the name of that investor (sometimes referred toas the
), but rather in the name of an intermediary.
2.Such a requirement, it has been argued, would be akin to requiring a casino to disclose togamblers the fact that the odds favor the house.
Is There a Cure for
, 81 V
. L. R
. 713, 744 (1995).3.Under the depository system of securities transfer, securities certificates are held in a centraldepository in the name of the depository, rather than in the customer
s name. Thus, when securities aretraded, it is no longer necessary to process each trade individually by obtaining certificates, inspectingthem, and reissuing and physically delivering new certificates in the name of the new owner. The de-pository retains record ownership.
Ralph C. Ferrara & Konrad S. Alt,
Immobilization of the Secu-rity Certificate: The U.S. Experience
, 15 S
228, 237-40 (1987). Securities held in thename of an intermediary are commonly said to be held in
It is important to note that individual beneficial owners of securities have no direct contractualrelationships with the depository
rather, individuals have contractual relationships with their brokers,which in turn have contractual relationships with the depository or, as is often the case, relationshipswith another intermediary (or intermediaries) which in turn is in privity with the depository.Most securities trades are made through a depository system known as the Continuous Net Set-tlement (CNS) System, involving the combined operations of two registered clearing agencies, the De-pository Trust Corporation (DTC) and the National Securities Clearing Corporation (NSCC). Securi-ties certificates are kept on deposit with DTC, registered under the name of DTC
s nominee, Cede &Co.
Beyond Negotiability: A New Model for Transfer and Pledge of Interests inSecurities Controlled by Intermediaries
, 12 C
. 305, 317-20 (1990). The interest of DTC
s participant institutions in the securities is recorded on the books and records of DTC. In turn,beneficial ownership of each participant
s customers is recorded in the participant
s books and records.DTC keeps track of all securities trades by participants. Participants become responsible totransfer or entitled to receive only net changes in the amount of each securities issue and cash. In orderto centralize the transfer of payments and securities, there is a novation of trade contracts, with NSCCcoming between the parties on each side of the transaction.
In sum, on each settlement date, eachNSCC participant pays to or receives one sum of money from NSCC and each NSCC participant trans-fers to or receives from NSCC, by book entry on the books of DTC, a single quantity of each securityissue involved.
. at 319.The vast majority of shares of major securities issues are on deposit at DTC and thus are not heldin the name of their beneficial owners. As of 1988, NSCC cleared and settled about 95% of all equitiestrades on the New York Stock Exchange (NYSE), American Stock Exchange (AMEX), and NationalAssociation of Securities Dealers (NASD) markets.
. at 317-18 nn.23-24. Stock held in streetname can represent as much as 80% of a public company
s outstanding shares.
John C. Wilcox,
AProxy Contest Check List
511, 521 (PLI Corp.