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Who holds your stock certificates -- and why

Two questions arrive regularly on dealing with a stockbroker. First, should stocks be left in street name with a broker? Second, what recourse does the owner of stocks have when stocks left in street name are sold by a broker without the owner's permission or direction?

When a client leaves stocks with a broker in street name, the owner's name does not appear on certificates. Evidence of ownership is reported on a computer printout sent to the client. There is no question about who owns the stock. The purchaser is the sole owner, and the broker simply maintains the stock in his possession, often using it as collateral for a loan.

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When stock is traded frequently, keeping shares in street name reduces the paper work, troubles, and possible risk of delivering signed certificates or unsigned certificates accompanied by a signed power of attorney. However, the owner who leaves shares in street name cannot easily sell those shares through another broker.

For most owners of stocks, asking for and keeping stock certificates is the conservative, no-nonense way of maintaining control. Some stockbrokers routinely order stock certificates for clients in each buy transaction. No extra charge should be levied for this service. When you keep your own certificates, you avoid the second problem -- selling shares without your permission.

Stocks you own may not be legally sold without your permission unless you have previously agreed to a discretionary relationship with your broker in writing. In this agreement you grant to your broker unrestricted right to buy and sell for your account at his discretion without your prior approval of each transaction.

If a client's shares held in street name are sold by the broker without permission, as apparently happened in the case of a Texas reader, the broker is liable for any losses sustained. As soon as the transaction is discovered, the owner should contact the broker and demand a correction. The broker must return the client to a whole condition by returning the stock. If the stock has increased in price, the broker will lose the difference. In any case, the owner is entitled to the stock without a change in basis.

If you should experience such a problem and the broker claims he cannot deliver your stock or indicates the sale was a mistake and refuses to correct it , contact the manager of the office. An individual stockbroker may attempt to bluff his or her way out of the situation, but the office manager or partner will recognize the firm's liability.

Should your discussion with the office manager not produce the desired results, you should contact either the New York or other stock exchange where the transaction occurred, the National Association of Securities Dealers (NASD), or the Securities and Exchange Commission. But before you take your case beyond the broker's office, be sure that you did not sign a discretionary account agreement in the flurry of paper work that sometimes accompanies the opening of a new account. In your complaint to the broker, ask to see any agreement purporting to give the broker discretionary authority. If there is none, you are free to carry your complaint elsewhere.


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