The Rise and Effects of the Indirect Holding System:How Corporate America Ceded Its Shareholders To Intermediaries

This paper explains how the choice of the indirect holding system for securities settlement forced U.S.issuers to cede their shareholder data to intermediaries. Part I describes the law applicable to thetransfer of certificated securities. Part II describes how the paper-intensive process of transferringcertificated securities led to a market failure in the 1960's. It further shows how the indirect holdingsystem was seen as a temporary, second-best solution pending the dematerialization of shares andimprovements in communications technology. In the mean time, the effects of separating beneficialand record ownership led to an expensive and inefficient process of shareholder communication andvoting. Part III examines this process, whose inefficiency offered service providers the profitableniche industry of assisting issuers to distribute proxy materials through and around extensive chains ofintermediaries. Part IV explains how, when law and technology had developed sufficiently to allow areturn to a system of direct issuer-shareholder relationships via a direct registration system,intermediaries acted rationally to absorb DRS into the DTTC system, and continue to enjoy theircentral role between issuers and shareholders. This Part also demonstrates how a truly effective directregistration system could provide the transparency necessary...