How Stocks Are Purchased, Sold and Traded

The "Street Name" System

More than 75% of all public company shares are held in "street name," meaning that the registered owner is a broker, bank, or other third party financial institution.  This practice of registering securities in the name of an institution other than the underlying owner helps to facilitate the processing of securities transactions.

Many years ago, securities were traded only with paper certificates.  Brokers on Wall Street hired runners to exchange stock certificates among financial institutions at the end of each trading day.  As the trading of securities became more sophisticated and in larger volumes, Wall Street suffered a paperwork crisis that almost crippled the securities industry in the late 1960's.

Today, securities transactions are settled through the use of securities depositories.  These depositories register and hold the securities in "nominee" name for financial institutions, such as brokers and banks, which are participants in this system.  By holding securities in nominee name, these depositories are able to facilitate the transfer of securities by computerized book-entry systems, instead of having to physically move stock certificates or formally transfer record ownership.

Under the street name system, a depository is the actual shareholder of record, meaning that it is the official owner of the corporate shares, even though it is not the individual or institution that is the underlying owner of the shares.  Under this framework, the underlying owner is called the "beneficial owner."  The beneficial owner enjoys the benefits of the shares, such as the receipt of dividends and the right to vote on important corporate matters, but does not hold legal title to the shares.

The vast majority of securities are deposited with The Depository Trust Company (DTC), a clearing agency that is registered with the U.S. Securities and Exchange Commission (SEC).  DTC generally holds these securities in the name of one if its subsidiaries, Cede & Co.  Click here to learn more about how this process works from the DTC website.

Beneficial Owner Classifications and the NOBO/OBO System

Under the current street name system, a publicly traded company does not know who its beneficial owners are and is unable to communicate directly with them.  Financial intermediaries, such as brokers and banks, maintain the names of the beneficial owners of street name securities, instead of the company maintaining this information through a shareholder list or register.  When they open their accounts, investors who hold shares in street name are classified into one of two categories, becoming either Non-Objecting Beneficial Owners (NOBOs) or Objecting Beneficial Owners (OBOs).  Companies are permitted to obtain lists of NOBOs for communication purposes only, but not OBOs, who, by definition, are listed on a broker's or bank's records as objecting to having their names and contact information provided to a company.  Under current SEC rules, only financial intermediaries, such as brokers and banks, are permitted to distribute proxy materials to beneficial owners.

This system is very costly for public companies in that shareholder voting and communications are handled through these third-party intermediaries.  Brokers and banks generally outsource these proxy administrative and processing functions to one company, Broadridge Financial Solutions.  Companies are responsible for paying for the cost of operating this system, without any control over the selection of service providers or the ability to use technology to streamline the process.

Investor Confusion about the Current System

A 2006 investor survey by the New York Stock Exchange (NYSE) found that there was significant investor confusion about the proxy voting process and the NOBO/OBO classification system.  According to this survey, investors do not understand how the current system works.  A copy of this study can be accessed below, and it indicates that the substantial majority of investors support direct communications with the companies whose shares they own.

Shareholder Communications in Other Countries

Direct communications between public companies and their shareholders are permitted in other countries.  Canada has enacted National Instrument 54-101, providing for direct communications between public companies and their beneficial owners.  In the United Kingdom, Part 22 of the Companies Act 2006 permits public companies to obtain information about all persons who have an interest in their shares, including beneficial owners.  An excellent explanation of the voting system in the United Kingdom can be found in the Report by Paul Myners to the Shareholder Voting Working Group, released in January 2004 and posted below.