Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, June 5, 1995 TAG: 9506060022
SECTION: MONEY PAGE: A-8 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
Until now, people have had the relative luxury of a week - five business days plus a weekend - to settle up. But the Securities and Exchange Commission upped the pace in what turned out to be a fight between the major national brokerage houses and their regional competitors.
It means that any move you make this Wednesday must be settled Monday instead of the following Wednesday. Buy or sell on a Monday, and the piper must be paid no later than Thursday.
(During this interim week, trades today must settle Friday. Transactions conducted Tuesday or Wednesday both settle Monday.)
Brokerage houses are touting their various money market accounts as a means of acting simply and quickly. But be warned: The costs of holding such accounts vary from nothing at all to $150 a year. In general, the national houses have charges, while regional brokerages have accounts that are free - at least for now.
The SEC said the change is designed to reduce volatility in the markets. The more rapidly an account is settled in a falling market, the less likely it is that a buyer will resent paying more money than the stock is worth a week later - or perhaps default.
But T. Michael Smith, president of Ferguson, Andrews & Associates in Roanoke, said the change was driven by financial institutions and large brokerages who wanted to reduce the problem of float. That means the brokerage house had to advance the money to buy the stock, then wait a week for payment.
Robert Kulp, manager of the Roanoke office of A.G. Edwards & Sons, said his company, a regional securities firm based in St. Louis, fought the proposal for the last four years. "Obviously, we lost to the big ones."
Kulp said A.G. Edwards "feels like it's an imposition on clients."
People who insist on holding their own stock certificates, perhaps to retain a choice of brokers when they sell, will have only three days to turn them in when they do trade. They face mailing the certificate the day they sell or making a trip to the brokerage.
Tyler Pugh, senior vice president and Roanoke branch manager at Wheat First Butcher Singer, said the problem is that clients have treated the broker's confirmation of the trade as a bill. They waited for the confirmation, then sent either the money for a purchase or the stock certificate for a sale.
Even working locally, Pugh said, "it's hard to rely on the mail." Anyone who mails a check or certificate the morning after a trade stands a good chance of being late.
Wheat First recommends that its clients use its Capital Resource Account, where they can deposit funds in a money market account and keep their stock records in the "street name," that is, in the broker's custody. That means clients don't get a stock or bond, keeping their holdings as an entry with the broker instead.
People with CAP accounts can have ATM cards and checks, if they want those amenities, to access their money market funds. Pugh said the holdings in the accounts are covered up to $500,000 by the Securities Investor Protection Corp., an industry group, and up to $10 million by private insurance.
At Wheat First, the account is free. The same is true at Ferguson, Andrews and at A.G. Edwards.
J.C. Bradford & Co., a regional based in Nashville, has two types of accounts, according to Peter Milward, Roanoke branch manager.
Bradford will hold stocks, bonds, mutual funds and the like, along with a money market account, without charge. Milward said a second type of account carries a $50 annual charge but pays an extra half-percent in interest, allows use of a Visa debit card and checks, and comes with a detailed statement that covers the cost basis of all holdings.
Unless the securities and money are in these accounts, Milward said, clients must mail checks or the certificates as soon as the trade is made over the telephone.
Ryland Hubbard, Roanoke manager for Merrill Lynch, a nationwide brokerage, said the custodial fee for holding securities is $40 a year. There are several other types of accounts ranging up to $150 a year.
At the Roanoke office of PaineWebber, another national brokerage, several people declined to discuss the situation or their types of accounts, and deferred to the headquarters in Weehauken, N.J. A spokeswoman there said its Resource Management Account costs $85 a year, plus $40 for an optional line of credit. The account has checking, a credit card, a choice of money market funds and private insurance of $25 million.
The national houses tend to have a more sophisticated clientele. Hubbard said that 99 percent of customers use street-name accounts. Someone demanding certificates "is very much an oddity."
Hubbard therefore sees very little problem with the three-day settlement period. "It's really not an issue with us. We are asset gatherers and financial planners," Hubbard said.
Smith estimated that 80 percent of customers leave their holdings in the name of Ferguson, Andrews, and only about half of them have funds on deposit in a money market account. The broker is trying to get more of its customers to use these accounts. The customers have nothing to lose since the accounts are free, he said. "It's just getting them to do it."
Kulp said only half the customers at A.G. Edwards are willing to leave their securities in the broker's name. With the money market fund currently paying 5.5 percent, Kulp said, "it's not a bad place to put extra money."
There are a lot of incentives to use the account, Kulp said. "It's a matter of education." People who want to switch brokers, he said, can transfer the accounts merely by signing one form with the new broker.
People may be forced to use the accounts in the future. Kulp and Milward predicted that the three-day requirement is only a prelude, a first step toward requiring settlement in one day or perhaps even instantly. "This is just preparing for it," Milward said.
by CNB