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DRS to hold your securities- an attractive option, but where are the Canadian securities authorities Print

drs.jpgDo you hold some of your investments at home (or perhaps in a bank safety deposit box) in the form of traditional certificates in paper form? Perhaps your investments are held on your behalf by your broker in so-called street form. In the first commentary in this series we compared holding your securities in paper form versus in street form.  Both alternatives have advantages but also some disadvantages for individual investors. You may not be aware of an emerging third alternative way to hold your investments called DRS for direct registration system. We will now describe the DRS alternative which can be advantageous to many investors, even though the Canadian financial system does little to promote it or even to bring to the attention of retail investors, and Canadian regulators have chosen to date to leave it unregulated.

The ideal system from an investor perspective

Before discussing DRS, let us begin by describing the ideal system that investors could use to safeguard their securities:


Readers of our site know our mantra  - the only thing investors can control are their investment costs, so minimizing initial set-up and ongoing costs are an important factor for us. Going paperless reduces costs:

The Canadian stock transfer association has estimated that transfer agent processing costs of a paperless transfer compared to an equivalent certificated transfer is estimated to be 40% to 60% less than the comparable process of a paper-based transaction. STAC SEC letter or as a PDF doc.2202. And CDS, the Canadian central clearing agency, describes paper transfers as an outdated "tradition”. See CDS or as a PDF doc.2192.

 2-Safe (physical and electronic loss risk

A safekeeping system should minimize risk of physical loss of your investments, for example through theft, flooding, fraud or fire. In this category we would throw in losses due to unauthorized electronic access to securities in paperless form.

3-Safe (insolvency risk)

Here we are concerned by the impact on you of the insolvency of the entity where you have placed your investments, whether that be your local bank or your investment dealer.


A safekeeping system should offer easy, timely access to locate your investments, which you will generally only do for purpose of disposing of them.

5- Convenient access to income

A system should facilitate easy access to income generated by your investments.

6-Convenient access to add to your holdings

This is most obvious where you hold shares and wish to add to your holdings through additional purchases including but not limited to the automatic reinvestment of dividends.

7- Under my control (what is called the touch factor *)

Finally, as do-it-yourself investors, the ideal system should permit as direct  an access and control as possible. By direct we also mean an access without being subject to theview of your financial intermediary except when you so wish. Who has not had the (disagreeable) experience of withdrawing a sizeable amount from your bank account, and having the teller inquire what the purpose of your withdrawal is, and whether you have you considered the bank’s investment products.

The principal advantage of holding a certificate is that you can take the asset with you.Registered certificates that are placed in “negotiable” form are another form of portability to avoid detection of ownership. There are always those, for various reasons, who wish to keep their ownership of certain assets private and portable. ….. Electronic ownership in nominee or DRS (both have an electronic trail back to the beneficial owner) enhances portability and provides investor choice over the degree of privacy. STAC   or as a PDF doc.2202.

*See InformedTrades video. 

Regrettably no system fully meets all these criteria. This said, let us now assess the traditional ways of holding our securities against these criteria.


Disadvantages of the traditional ways to hold your investments

In our previous commentary we compared holding your securities in paper form versus in street form.

Worrying about losing the paper certificates evidencing their investments is enough for most people to not keep traditional certificates in paper form. But keeping them in street form also has some features that some investors may find objectionable. The two most obvious are intermediary risk and lack of separation:

Intermediary risk

What do we mean by intermediary risk? In street form your ownership is no longer direct. It now depends on the broker correctly recording your ownership in its accounting records, not improperly dealing with your investment, and in the worse case not going bust. In the bankruptcy scenario you will be dependent on the financial ability of the local industry protection fund to make you and other clients of the broker whole. We have looked in detail at this issue recently ( see Your investment dealer goes bankrupt- part 3- preventive measures  ) and while the risk is very low, given the lack of a government –run plan protecting investors against broker insolvency (similar to deposit insurance), it is not NIL. This may bother some very risk-adverse investors:

Here is how US investors in DRS are protected:

Since the direct registration puts shares in your name, rather in street name, these investors feel that this gives them greater protection against a brokerage collapse in which client assets turn out to be missing. This concern has become much more widespread since the failure of MF Global.  The International Investor description of DRS or as a PDF doc.2185

Robert Malcolm of Computershare explained to us that DRS in Canada operates in much the same way:

Securities in DRS not subject to broker insolvency risk?-correct, as they are registered to the holder and therefore are not being held by the broker. Although any reputable broker is insured and the holder therefore covered up to a certain amount in the case of insolvency. See also Contrarian Investor or as a PDF doc.2171.

Lack of separation

What we call lack of separation has 2 aspects.

  • First, full service brokers like to have all or most of your investments on deposit with them for at least three reasons. It gives them a good overall picture of their clients’ financial situation, and therefore puts them in a position to give better, more personalized advice. In addition, if securities are to be sold quickly the fact they are already held by the broker accelerates the process. Finally, cash from securities on deposit with your broker (e.g. dividends, interest, sales proceeds) is automatically deposited to your broker’s account, and available for re-investment.
  • But there is a flip-side to this. Many do-it-yourself investors are not comfortable with their full service broker having this much knowledge or control over their affairs. Many investors (probably well over 50%) use more than one broker, and do not necessarily want to centralize their investments at one broker. They may not appreciate calls from their broker every time they have accumulated enough cash to make new investments. Often they prefer that their cash proceeds be automatically deposited to their bank account  rather than into their broker account where they have to request that the money be sent to them and often to explain to their sometimes too-inquisitive broker what they are intending to use what after-all is their money.

There is an alternative system that is available to address these disadvantages for some, but not all, types of investments: DRS or direct registration system.

Last Updated ( Saturday, 29 December 2012 )
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