Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, August 7, 1994 TAG: 9408060010
SECTION: BUSINESS PAGE: F1 EDITION: METRO
SOURCE: Mag Poff
DATELINE: LENGTH: Long
They will have only three business days to produce the purchase money - or the sold security - instead of the full week to which they are accustomed.
And to speed the trading process, brokerage firms are escalating their efforts to convince clients to use their so-called "street name" service. That's a system in which the security is just an electronic blip on the brokerage house's computerized records rather than a paper certificate in a client's bank vault.
June may be 10 months in the future, but brokers already are starting to send their customers notice of the coming change, which is mandated by the Securities and Exchange Commission.
James P. Kern, chief financial officer of Ferguson, Andrews & Associates in Roanoke, said the switch to Trade-Plus-Three - abbreviated in the industry as T+3 - is aimed primarily at reducing the payment risk that exists in the securities markets.
"By shortening the settlement cycle," he pointed out, "there is less chance for significant price movement before transactions are settled."
In other words, there will be fewer instances of disgruntled customers writing checks for $49 a share when the price during the intervening week has dropped to $41 a share.
Kern said the change will be most pronounced for the customer who is accustomed to remitting a check to pay for a trade after receiving a trade confirmation from the broker.
"Those customers will have to adapt to a system in which the confirmation functions as documentation of the trade rather than an invoice" asking for payment, Kern said.
"This is actually the way in which the industry has always viewed confirmations," Kern added. "However, retail clients have traditionally viewed such documents as the official request for payment by the brokerage firm." In some instances, they have seen the confirmation as a request to start looking to produce a certificate for the stock or bond that has been sold.
Thus, he said, the change will require education for those investors who pay for stock purchases by check rather than by having money on deposit in a brokerage account.
On the benefit side from the customer's viewpoint, Kern said, proceeds for sales will be available to customers more quickly. He also expects the industry to develop enhanced cash management accounts to encourage clients to keep excess funds with the broker.
Ferguson, Andrews began its internal education program several months ago to prepare account executives for the switch. Now the firm is preparing to communicate with all of its customers to alert them to the move.
Richard W. Wertz, vice president at A.G. Edwards & Sons in Roanoke, said brokerage houses are trying to get all their clients to hold their securities in an account with the firm. Customers would thus settle for a monthly statement of securities on file with the firm rather than receive the actual stock or bond certificates.
If the securities are in a "street name" account, they are available for trading instantly.
In addition, Wertz would have them do more than simply leave their securities on deposit. Brokerage houses, he said, also want customers who trade to keep cash in the account so the cost of the sale can simply be deducted three days after the transaction.
Proceeds from a sale, along with monthly dividends and interest, would also fall into the account.
The report about a stock trade, delivered by mail, would then function merely as written confirmation for tax purposes and other records.
Wertz said "a pretty large number" of clients already use street name service. He pointed out that even older people are getting used to the system because all government bonds are merely book entries these days.
People, Wertz said, are "gradually giving up the idea they have to have those certificates."
It's a good thing, too. Wertz believes the day is rapidly approaching when companies no longer will issue certificates for their stock and - like government bonds - merely enter transfers by computer.
Willian Nash, manager of the Roanoke office of Scott & Stringfellow Investment Co., said his firm already is sending fliers to customers about the coming change. That flier urges readers to switch to street name accounts.
Scott & Stringfellow said 70 percent of its clients already leave their securities on deposit with the company.
That way, the flier points out, owners don't have to worry about tracking or losing certificates. The certificates are replaced by a monthly statement detailing all income and transactions, and all securities - up to $2.5 million in value - are protected by insurance from loss through fraud or failure of the brokerage.
"We are trying to educate people," Nash said. "We've encouraged people to go to street name over the years."
That's especially true for people who hold bonds individually and thus may miss a call for redemption. If that happens, Nash said, the person loses the interest income.
Despite the campaign, Nash said, some clients simply will not accept an electronic blip in lieu of holding an actual certificate.
If so, he added, "we will work with them the best we can."
If such a client buys a security, Nash explained, the firm will call back to the customer immediately after executing an order with the exact price of the trade.
The customer, in turn, will be expected to drop a check in the mail for that amount that day - or at least in time to get it to the brokerage firm within three business days. There will be no time to dawdle as is possible now when people have the luxury of five business days.
by CNB