Advertisement
  1. Archive

"Order out' stocks, bonds to avoid broker's conditions

Q. The "investor's account agreement" my husband and I signed when we went to a brokerage firm and purchased stock says, in part, securities the firm holds in our account "may, from time to time and without notice, be pledged, re-pledged, hypothecated or re-hypothecated." I'm no lawyer, but this sounds to me like the company can lend our securities to other customers and brokers, without even telling us. Am I right?

A. Yes. Your interpretation of that legalese is correct. Your account agreement includes a hypothecation clause, giving the brokerage firm the right to put securities it holds for you out on loan.

All "customer's agreements," as they are more commonly called, do not contain such clauses. But you must agree to hypothecation if you have a margin account, thereby putting up only part of the price of securities you buy and borrowing the rest through the brokerage firm.

Various rules and regulations protect you against loss or theft of securities hypothecated by the brokerage. Just the same, if you are uncomfortable with that arrangement and have no plans to trade on margin, instruct the brokerage to scrap your present agreement and provide a new one, sans the hypothecation clause. On the off chance the brokerage refuses, transfer your account and the securities in it to a more agreeable brokerage.

Or, "order out" your stocks. Instruct the brokerage firm to register the stocks in your name and deliver the certificates to you. Then, if you decide to sell, you can do so through any firm.

You can take possession of certificates for virtually all types of securities, with two notable exceptions.

All new issues of U.S. Treasury bonds, notes and bills now are in "book-entry" form, with no certificates printed. Ownership is recorded on the "Treasury Direct" computer system where individual investors can have accounts of their own.

Many municipal bonds and some corporate bonds are available only in book-entry form. To own those bonds, investors must have them in accounts at brokerages or banks. Those middlemen collect the bond interest, sometimes are slow passing that money along to the bond owners and often charge fees for the so-called "service."

Q. Six years ago, I bought a zero-coupon bond for my first grandchild. I made the purchase through a big brokerage firm, with no explanation whatsoever. The price was $500. The bond's interest rate is 13.875 percent, and its maturity date is May 15, 2004.

Two years ago, the brokerage charged a $50 annual service fee on the account. The bond is the only thing I have at that brokerage. I told the broker I wasn't going to pay the fee, and I asked for the bond. I didn't get the bond, but that year's fee was waived.

Now, I am being billed again for a $50 fee. At this rate, the brokerage will make almost as much on the bond as my granddaughter. Does the firm have the right to hold the bond against my will?

A. No. If the bond is available in registered form, you can order it out and receive a certificate. If the bond is in book-entry only form, you can transfer it to a different brokerage, a commercial bank or trust company.

In the latter case, the brokerage now holding that bond could hit you with a transfer charge and refuse to let go of the bond until you pay both that charge and the annual fee about which you are unhappy.

Brokerages can charge any fees they choose. The majority lay on charges for holding securities in "inactive accounts" for customers who seldom, if ever, buy or sell and consequently do not generate commissions.

You are stuck, unless you have a relatively active account at a different brokerage firm or you are a good customer at your bank. This is one of the disgraceful characteristics of book-entry-only corporate and municipal bonds.

William Doyle welcomes written questions, but will be able to give answers only through the column. Address questions to William Doyle, King Features Syndicate, 235 E 45th St., New York, N.Y. 10017.

YOU MIGHT ALSO LIKE

Advertisement
Advertisement