Bloomberg News

Papering Walls With Stock Imperiled as Bourses Mull Digital-Only

January 11, 2014

The paper stock certificate, a relic of the pre-electronic age, may finally be on its way out of the U.S.

IntercontinentalExchange Group Inc., the operator of the New York Stock Exchange, and Nasdaq OMX Group Inc. are considering a ban on newly public U.S. companies issuing paper shares, according to Depository Trust & Clearing Corp., which processes the nation’s securities trades. That would be the strongest step yet toward mandating that equity ownership in the $22 trillion American market be entirely electronic.

“The stock certificate is no longer the most effective or efficient means of accomplishing the goal of certified ownership,” said Brad Vopni, who was an executive at New York-based Nasdaq’s U.S. equities department until the middle of last year. “They have generally become collectors’ items.”

Five decades after Wall Street’s shift to computers began, Bank of America Corp. (BAC:US) and Walt Disney Co., whose shares featuring characters such as Mickey Mouse were popular children’s gifts, have recently gone digital. Twitter Inc. (TWTR:US) abandoned plans to provide paper stock following its initial public offering in November, said spokesman Jim Prosser. Others are sticking with tradition, including Manchester United Plc (MANU:US), which issued about 2,350 certificates since its August 2012 IPO on the NYSE, according to Manchester United spokesman Jon Tibbs.

The administrative hassle of documenting share ownership on paper was underscored in 2012 when Hurricane Sandy flooded a DTCC vault in Manhattan, damaging stock and bond certificates.

Efficiency Gain

DTCC has been pushing for a move away from paper, arguing that electronic documents are cheaper and more efficient, according to Daniel Thieke, a managing director at the organization. Both NYSE and Nasdaq are considering bans on newly public companies issuing certificates, Thieke said.

“We are advocates for this concept, but ultimately it would be the exchanges and the companies themselves that have to make this decision,” Thieke said.

Sara Rich, an NYSE spokeswoman, and Nasdaq’s Robert Madden declined to comment.

Any rule change would only affect the ability of companies going through an IPO to issue paper certificates, and wouldn’t void documents already issued by public corporations.

DTCC has been pushing what it calls dematerialization for more than a decade, and its efforts have been largely successful. The organization now holds about 1.7 million certificates, about 300,000 of which are for stocks, in its vaults compared with more than 8 million in 2000.

Disney’s Shift

The U.S. is ahead of some nations. Hong Kong’s Legislative Council Panel on Financial Affairs said Jan. 6 that it plans to introduce a bill in the second quarter that will mandate the jurisdiction’s move from paper certificates to electronic documentation.

Some high-profile U.S. companies haven’t waited for rule changes to go electronic. Disney of Burbank, California, stopped issuing paper certificates in October. As an alternative, it’s providing non-negotiable “certificates of acquisition” to those who request them.

Bank of America said in an August filing that it would no longer issue certificates. The Charlotte, North Carolina-based bank took the move because of the cost of issuing and replacing them, said spokesman Jerome Dubrowski.

Procter & Gamble Co. (PG:US) of Cincinnati also abandoned paper last year, according to spokeswoman Jennifer Chelune.

“In life in general, and in the markets in particular, anything that’s paper has a limited life,” said Patrick Healy, the Chevy Chase, Maryland-based chief executive officer of Issuer Advisory Group LLC, which helps companies with their IPOs. “From the company’s perspective, stock certificates can get lost, for example. Everything’s easier electronically.”

To contact the reporter on this story: Sam Mamudi in New York at smamudi@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net


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