What it means
For a registered security, ownership is a matter of record, not possession. The issuer, or an agent acting for it, keeps a register of holders, and the name on the register is the owner.
If the paper certificate is lost or stolen, the owner can ask for a replacement, because the register holds the real proof. The alternative is a bearer security, where whoever holds the certificate is treated as the owner.
Bearer securities are easy to transfer, but they are easily lost or stolen and can be used to hide ownership. For that reason, many countries have restricted or ended them, and registered securities are now the norm.
Registration brings several practical benefits. Interest and dividends can be paid directly to the owner, often by electronic transfer, and the issuer can send notices and voting papers to the right person.
Lost certificates are not a disaster, and the trail of ownership helps regulators who want to fight fraud and money laundering. The trade-off is that transfers need an extra step.
When a registered security is sold, the buyer must be recorded and the seller removed, and this is done by the registrar or a transfer agent. In modern markets the process is handled electronically through central depositories, so the delay is short, but it still has to happen before the buyer is formally recognised.
For a finance team, registered securities mean good record-keeping duties. A company that holds bonds in its treasury portfolio needs to ensure that its name is correctly registered and that its contact details are current.
Incorrect details can lead to missed payments or delays in selling the asset, so many treasurers review registration details every year. A nuance is that registration can be at one of two levels.
The security may be registered directly in the investor's name, or in the name of a broker, bank or depository that holds it for the investor. The second route is more common, and it is the reason the idea of a beneficial owner exists.
In practice
Real-world examples.
Example
A retiree buys a corporate bond that is registered in her name. Each half-year the issuer's paying agent sends the interest to her bank account, because her name and details are on the register.
Example
A company's treasurer holds a portfolio of registered bonds through a custodian bank. When one bond matures, the principal is paid to the custodian, which credits the company, and the register is updated to show that the bond has been redeemed. The treasurer files the confirmation with the year-end records.
Example
A small investor loses the paper certificate for shares held in her own name. She contacts the registrar, proves her identity and receives a replacement, since the register confirms that she is the owner. She pays a small fee, and the old certificate is cancelled so that it cannot be misused.
Case study
Seen in the real world.
Alder Bay Holdings is an illustrative, fictional company that bought $2,000,000 of registered bonds for its cash reserves. The treasurer assumed that the broker had dealt with all the paperwork, and she did not check the details on the register.
When the first interest payment fell due, the money went to a former address and bank account that had been left on the record by mistake. It took five weeks to trace the payment and have it reissued, and the company lost the use of about $40,000 of interest for that time.
The treasurer then introduced a simple annual check of every holding's registration details. The check takes less than an hour and covers the name, the address, the bank account and the contact person for each holding. The illustrative lesson is that a registered security is only as good as the accuracy of the name and details on the register.
Watch out
Common mistakes.
- Assuming that holding a certificate is proof of ownership, when for a registered security the register is what counts.
- Failing to update contact and bank details on the register, which can send payments to the wrong place.
- Ignoring the transfer step when selling, since the buyer is not formally recognised until the record is changed.
Questions
People also ask.
What is the difference between a registered and a bearer security?
A registered security names its owner on the issuer's books, while a bearer security is owned by whoever holds the certificate.
What happens if I lose a certificate?
You can usually ask the registrar for a replacement after proving your identity, because the register shows that you are the owner.
Are most modern securities registered?
Yes, registration is the standard approach, and holdings are often recorded electronically through a depository. Investors also gain peace of mind, because the register protects them even if a paper certificate disappears. Paper certificates are now the exception in many markets.
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