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A Paper War Over Stock Certificates

Investing: Everyone wants to eliminate the printed documents, except dubious owners, historians and collectors.


Retired pharmaceutical executive Edward Adams sees nothing unusual in the way he holds his stocks: on paper certificates in a bank's safety deposit box, backed up by records held in his house safe.

"I don't know the security of their system, but I know the security of mine," Adams said from his suburban Philadelphia home. "Could [the brokers' system] be compromised in some way? Could a blip erase your holdings? I have no idea."

Adams may want paper stock certificates, but Congress doesn't: It told the Securities and Exchange Commission to get rid of them back in 1975. The securities industry doesn't want them either, and has made holding paper a hassle for investors, who must request a certificate for $25, then wait six weeks to get it. Even companies don't seem to want them: Where they once attracted individual investors with fanciful engraved images, they now offer rather plain paper.

Now the industry, on the verge of a Y2K-scale project to cut the time it takes to settle a trade from three days to one, would like to get rid of certificates once and for all. The general consensus is that the holdouts for paper are Luddites and senior citizens who give their grandchildren Walt Disney shares because they have a picture of Mickey Mouse on them. But the industry is resigned to the fact that a segment of the public demands certificates.

"I don't think we're looking to force the public to do something they don't want to do," such as by imposing a mandatory recall date for certificates, said John Panchery, vice president at the Securities Industry Assn. (SIA) and project manager. "We would like to phase them out."

The industry started its slow but steady shift to electronic transfer in the wake of the "paperwork crisis" of the late 1960s that forced brokers to a four-day workweek, giving back offices every Wednesday to catch up on paperwork.

Today one in 96 new stock purchases generates a certificate, compared with one in 27 in 1994. The number of Charles Schwab customers willing to pay $25 extra to get a paper certificate dropped from 4,300 a month in 1998, the earliest year for which figures are available, to 3,700 a month this year. Firms that specialize in electronic trading handle even fewer requests: Datek Online Financial Services gets only about 200 requests a month.

But one in four shares of companies that trade on the Nasdaq Stock Market and one in eight shares of New York Stock Exchange stocks are still held on old-fashioned paper, according to the Depository Trust, which handles all the back-office work for Wall Street. The company processes about 14,000 certificates a day, roughly 3.5 million a year.

In July, the SIA surveyed investors to figure out what motivates them to cling to stock certificates and to gauge their willingness to part with the paper in the next few years. Results aren't in yet.

"It's amazing to me that there are still people who want to hang on to paper certificates," said John Markese, president of the American Assn. of Individual Investors. "We try to discourage that."

The chief argument against paper certificates is the very one some investors use in rebelling against electronic transactions: security. Last year alone, investors made 5 million claims of lost stock certificates worth $28 billion, the SEC says. Depository Trust said it does not recall any significant amount getting lost electronically. No one seems to keep track.

Adams scoffs at the lack of data.

"So they're telling you they have the number of paper certificates that are lost but they don't have the number for the other kind?" Adams asked. "Now you see why I'm staying with paper certificates."

The number of lost certificates prompted the SEC last October to ask for a new rule that would put much tighter controls on certificates once they are sold and as a result canceled. The agency says the rule would prevent such incidents as the disappearance of more than $110 billion worth of canceled certificates from a Citibank warehouse in New Jersey in the early 1990s. Those certificates ended up in the hands of unwitting European investors and even prominent American brokers such as Salomon Smith Barney, according to sources close to an investigation into the disappearance.

In making its proposal, the SEC invited the public to comment on whether the agency should mandate the destruction of old certificates. Historians and collectors--the few who noticed the rule--answered with a resounding no.

"Please don't force transfer agents to destroy our history by forcing the destruction of canceled securities," Georgetown University associate finance professor James Angel wrote to the SEC. "Many old stocks and bonds are artistically very beautiful. They make great decorations. Many others have very high historical value, and provide vivid evidence of great and not so great historical events."

Just as the certificates are becoming more scarce, or perhaps because they are, interest in collecting them has picked up.

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