A Wise Choice

One of the questions that I often receive has to do with dividend reinvestment plans (DRIP). Recently, a lady wrote to me asking, “Now that I have the paperwork I need to complete the name change on the account from my maiden name to my revocable living trust. I have a quick question for you. With this change, I have to send my certificated stocks, which are in my maiden name to my financial advisor. I have been told that I have the option to have the certificated stocks retitled and sent back to me or to have them hold the certificates. Do you have a preference?

There is more to this question then most consumers are aware. The bottom line is to have them hold the certificates. The process to replace a stock certificate is a difficult and expensive task for an individual investor and here is why. There are three ways in which a security may be held: physical certificate, “Street Name” registration and “Direct” registration.

Physical Certificate The security is registered in your name and you have an actual, hard copy stock or bond certificate representing your ownership of the security.

“Street Name” The security is registered in the name of your brokerage firm and your brokerage firm holds the security for you in “book-entry” form. “Book-entry” simply means that you do not receive a certificate. Instead, your broker keeps a record in his or her books that you own that particular security.

“Direct” registration – The security is registered in your name, and either the company or its transfer agent holds the security for you in book-entry form.

Now, what happens if your physical stock certificate is lost, stolen, or accidently destroyed [my dog ate my stock certificate]? The first step is to immediately contact the transfer agent and request a “stop transfer” to prevent ownership of the securities from being transferred from your name to another investor’s name.

Next up, you must complete an affidavit stating all the facts surrounding the loss of the stock certificate. And then you must purchase an indemnity bond to protect the corporation and the transfer agent against the possibility that the lost stock certificate may be presented later by an innocent purchaser. This bond usually costs between two or three percent of the current market value of the missing certificates!

I recommend that investors keep a copy of both sides of their stock certificate. If a certificate is lost or stolen and then transferred on the books of the transfer agent to another owner, it may be impossible for you to establish that you owned it because the transfer agent will no longer have a record of your name. But if you have a record of the certificate numbers, the transfer agent should be able to reconstruct when it was transferred and to whom.

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