Holder of record: Meaning, Criticisms & Real-World Uses

What Is Holder of Record?

A holder of record is the individual or entity officially recognized as the legal owner of a security on the books of the issuing company or its transfer agent. This designation is central to securities ownership within financial markets, as it determines who is entitled to receive dividends, exercise voting rights, and receive corporate communications. While a person may be the actual economic owner of a stock, their status as a holder of record dictates their direct relationship with the issuer. The holder of record is the party whose name appears on the shareholder register maintained by the company or its agent.

History and Origin

Historically, direct ownership of securities involved physical certificates, where the holder of the certificate was explicitly the holder of record. This system, however, became increasingly cumbersome with the growth of trading volumes in the mid-20th century, leading to a "paperwork crisis" in the securities industry. In response, institutions like the Depository Trust Company (DTC) were established. The Depository Trust Company (DTC), founded in 1973, was created to address this challenge by immobilizing physical securities and facilitating "book-entry" changes to ownership, thereby reducing the need for physical certificates and improving the efficiency of clearing and settlement processes.,⁶,⁵ This shift allowed a central entity, typically a nominee of the DTC (such as Cede & Co.), to become the holder of record for a vast number of securities, while individual investors held their shares indirectly through brokerage firms.

Key Takeaways

A holder of record is the registered legal owner of a security on the issuer's official books.
This status grants direct rights, such as receiving dividends and exercising voting rights.
For many investors, their brokerage firm acts as the holder of record for shares held in "street name."
The evolution of record-keeping from physical certificates to book-entry systems has streamlined securities transactions.
Understanding the distinction between a holder of record and a beneficial owner is crucial for investor rights and corporate governance.

Interpreting the Holder of Record

The concept of a holder of record is fundamental to understanding how ownership is formally recognized in financial markets. When a person is the holder of record, they are directly registered with the issuing company or its transfer agent. This direct relationship means they receive official communications, such as proxy statements and annual reports, directly from the company. They also have the ability to directly exercise their voting rights and receive dividend payments without an intermediary. This direct registration stands in contrast to holding shares in "street name," where a brokerage firm or bank is the registered holder.

Hypothetical Example

Consider an investor, Alice, who wishes to own shares of Company XYZ. Alice has two primary ways to hold these shares:

Directly Registered: Alice opens an account directly with Company XYZ's transfer agent through a Direct Registration System (DRS). In this scenario, Alice's name appears on Company XYZ's shareholder register as the holder of record. She would receive all corporate communications, including dividend payouts and proxy voting materials, directly from Company XYZ.
Through a Brokerage Firm: Alice purchases shares of Company XYZ through her brokerage account at XYZ Brokerage. In this more common scenario, XYZ Brokerage, or its nominee (often Cede & Co. as part of the Depository Trust Company), is listed as the holder of record on Company XYZ's books. Alice is the "beneficial owner," meaning she has all the economic benefits of ownership, but her shares are held in "street name." XYZ Brokerage would then forward dividends and proxy materials to Alice.

Practical Applications

The distinction of a holder of record has several practical applications across investing, markets, analysis, and regulation:

Corporate Governance: The holder of record is the party legally entitled to vote on corporate matters, such as electing directors or approving mergers. In cases where shares are held in "street name," brokerage firms facilitate this proxy voting process by forwarding materials and collecting instructions from beneficial owners. The Securities Industry and Financial Markets Association (SIFMA) has reported on the process through which shareholder communications and proxy voting are managed for "street name" holders.⁴
Dividend Distribution: Companies pay dividends to the holders of record as of a specific record date. If shares are sold before the ex-dividend date, the buyer, if they become the holder of record by the record date, will receive the dividend.
Regulatory Compliance: Regulatory bodies, such as the U.S. Securities and Exchange Commission (SEC), often use the number of holders of record to determine certain reporting and registration requirements for companies. For instance, SEC Rule 12g5-1 defines how securities are "held of record" for purposes of Section 12(g) of the Exchange Act, which mandates registration for companies reaching certain shareholder thresholds.³,²
Securities Lending: In financial markets, shares held by brokerage firms as the holder of record can be loaned out for short selling, a practice that highlights the separation between legal and beneficial ownership.

Limitations and Criticisms

While the system of separating the holder of record from the beneficial owner, primarily through book-entry securities, has greatly enhanced the efficiency of the capital markets by reducing the need for physical certificates and speeding up the settlement cycle, it also introduces certain complexities and criticisms.

One significant limitation is the opacity it can create regarding the true underlying ownership of securities. When a large central depository like the DTC is the universal holder of record, and brokerage firms hold shares in "street name" for their clients, identifying the ultimate individual investors becomes challenging. This lack of transparency, often referred to as a "beneficial ownership transparency" issue, can pose challenges for regulators and law enforcement in combating illicit financial activities such as money laundering and terrorist financing. Various organizations and reports, including those from the Tax Justice Network, highlight the difficulties in achieving full beneficial ownership transparency.¹

Furthermore, the indirect holding system can sometimes complicate shareholder engagement, as beneficial owners must rely on their intermediaries (brokerage firms) to transmit proxy materials and ensure their votes are counted. While the system is designed to facilitate this, delays or miscommunications can occur.

Holder of Record vs. Beneficial Owner

The terms "holder of record" and "beneficial owner" are often confused but represent distinct aspects of securities ownership.

A holder of record is the legal owner whose name appears on the official register of shareholders maintained by the issuing company or its transfer agent. This entity has a direct legal relationship with the issuer and is the one that formally exercises rights like voting and receiving dividends.

A beneficial owner, on the other hand, is the individual or entity that enjoys the economic benefits of ownership, even if their name does not appear on the issuer's official books. For most individual investors, especially those holding shares in a brokerage account, they are the beneficial owner, while their brokerage firm is the holder of record. The brokerage firm holds the shares in "street name" for the benefit of its client. This distinction means the beneficial owner ultimately profits from the stock's performance and receives dividends, but they may need to rely on their broker to facilitate the exercise of their rights, such as proxy voting.

FAQs

Who is typically the holder of record for shares held in a brokerage account?

For shares held in a brokerage account, the brokerage firm itself, or a nominee like Cede & Co. (representing the Depository Trust Company), is typically the holder of record. The individual investor is the beneficial owner.

How does a holder of record receive dividends?

A holder of record receives dividend payments directly from the issuing company or its transfer agent as of the official record date for the dividend.

Can a beneficial owner attend shareholder meetings and vote?

While a beneficial owner can attend shareholder meetings, to vote directly in person, they typically need to obtain a legal proxy from the holder of record (their brokerage firm). Otherwise, they vote by providing instructions to their brokerage firm, which then casts the vote on their behalf.

What is the Direct Registration System (DRS)?

The Direct Registration System (DRS) allows investors to hold their securities in book-entry form directly on the records of the issuer's transfer agent, making them the holder of record without needing a physical certificate or a brokerage intermediary.

Why is the holder of record important for corporate governance?

The holder of record is critical for corporate governance because they are the party with the legal right to exercise voting rights on company matters, such as electing board members or approving major corporate actions.