Investors' securities are usually safer in hands of brokerage firm


August 08, 1994|By JANE BRYANT QUINN

NEW YORK -- Stock and bond investors are finding it hard to get their hands on the securities they own. You used to receive an engraved certificate in the mail. Now, there's just a regular statement of what's in your brokerage account.

This worries investors who wonder how safe their brokers are. Kidder, Peabody & Co. took a stunning loss, after learning that one of its bond traders had been booking phony profits. Prudential Securities, also in the red, recently settled charges of fraud over many of the soured limited partnerships that it sold in the 1980s. So far, Prudential's investors have gotten $144 million back, with much more to go.

Kidder and Prudential each have a big Daddy Warbucks to bail them out. General Electric Co., which owns Kidder, has ponied up $200 million so far to keep the brokerage house afloat. The Prudential Insurance Co. of America injected $180 million into Prudential Securities and is looking at a legal bill exceeding $1 billion. Because of their backing, no one expects these securities firms to fail.

But the question remains: Would you be better off holding your own securities rather than trusting your firm to hold them for you?

In general, investors no longer take possession of the securities they've bought. All Treasury securities and some tax-exempt municipal bonds are issued only in "book entry" form. That means there are no negotiable certificates, just a computer record of your purchase.

Certificates still exist for other bonds and most stocks, but a large percentage of them are "immobilized." That means they're held in a central depository and never moved. The depository keeps track of which institution buys or sells.

Jonathan Kallman, associate director of market regulation at the Securities and Exchange Commission, estimates that somewhere between 50 percent and 70 percent of all securities are currently immobilized or in book-entry form.

Twenty years ago, it was only 10 percent to 15 percent, he told my associate, Amy Eskind.

Some brokerage firms charge you a fee if you want a stock certificate issued in your name. It's $20 at Merrill Lynch, regardless of how many shares you purchase. Charles Schwab & Co., which currently provides certificates free, will start to charge $15 after Aug. 15.

You'll begin to see more of that. Starting next June 1, brokerage firms will be required to complete all transactions within three days, down from the present five days. Brokers think it will be more expensive to settle in so short a time unless they have instant access to the securities that are being bought and sold.

Your securities are safer in a brokerage house than in your hands. Last year, $4 billion worth were stolen, counterfeited or lost, according to the SEC. Lost certificates can be replaced, but you pay a hefty price.

When you hold your own certificates, you also risk missing a call on your bonds (requiring you to cash them in early); and might overlook a tender offer to purchase your stock at a special, high price. A brokerage firm would handle this for you, if you've kept your securities there.

On the other hand, a stock or bond certificate is portable -- which means you can sell it immediately and through any broker. If you have to sell an immobilized or book-entry security fast, you generally have to go through the broker you bought from.

Any time you want, you can transfer some or all of your account to another brokerage firm. Under stock exchange rules, brokers have to complete the transfer within 10 days (15 days for an Individual Retirement Account). Your new broker might sell securities for you even before your account has been moved.

You don't have to sell the securities before they're transferred. You merely fill out a form and your account will be moved intact. However, your new broker might not accept a brand-name investment sponsored by your former firm, like a Prudential or Kidder mutual fund. You might have to leave that investment at your former firm or else sell it.

The industry is developing a system that would register the security in your name, leave it with the brokerage house, yet make it transferable to another broker within three days. Kallman hopes the new procedures will be in place by next June 1.

If you keep securities with your broker, but rarely buy or sell, some firms will charge you an annual "inactivity fee." You might want to hold your own certificates just to avoid that demeaning fee, although you'd have to pay for a safe deposit box to keep your securities secure.

Jane Bryant Quinn is a syndicated columnist. Write to her at: Newsweek, 444 Madison Ave., 18th Floor, New York, N.Y. 10022.

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