Custody and Control of Securities

The whole unit on one sheet: how a firm protects, counts, delivers, and eventually resells the securities it holds for customers.

Which One-Liners Win Points?

• Custody is physical possession; control is a recognized location or condition. Control does not require the firm to physically hold the certificate.
• Segregation keeps customer securities separate from the firm's own assets. It also keeps them away from the firm's general creditors.
• Street name changes the registered name, not the beneficial owner. The customer keeps the economic interest even though the firm or its nominee is the registered holder.
• A registered certificate needs an assignment; a bearer certificate needs only possession. That difference decides what makes each one a good delivery.
• Meeting the holding period opens the safe harbor; it does not remove the legend. The resale must still satisfy the safe harbor's other conditions.

Which Numbers Matter Most?

How Do Custody, Control, and Street Name Fit Together?

• Control covers a clearing corporation, an exchange or association subsidiary, or a custodian bank under central handling, when delivery needs no payment and the firm's records identify the entitled customers, plus a Regulation T omnibus account free of any charge, lien, or claim, and securities in transit between the firm's own offices.
• Firms must promptly obtain possession or control of fully paid and excess margin securities; a timely written loan agreement, signed at or before the loan, preserves that status for borrowed securities. Lending eligible margin securities needs written authorization first; borrowing needs written disclosure before the first borrow, warning that Securities Investor Protection Act coverage may not apply and collateral may be the only recovery source.
• Street name registers securities in the broker-dealer's or its nominee's name while the customer stays the beneficial owner; directly held mutual fund shares register in the customer's own name instead.

What Makes a Delivery or Count Verifiable?

• A securities count must physically examine and count everything the firm holds, including repurchase and reverse repurchase securities, verify anything out of physical possession, and log each unresolved difference in a difference account. People with no direct responsibility for the securities or records must run it.
• A box count is a periodic physical count of certificates, complete only when matched against the stock record, which verification also compares to depository positions and outside custodian or clearing records.
• Good delivery needs a security a receiving party can accept and transfer without defect: a registered certificate needs a proper assignment or endorsement, a power of substitution when required, a matching signature, and an acceptable guarantee; a bearer certificate transfers by possession.
• A reporting institution reports a criminal or noncriminal missing or lost certificate to the SEC or its designee and the registered transfer agent. It reports a counterfeit certificate separately.
• DRS registers the investor directly on the issuer's books; DWAC electronically moves securities through the transfer agent. A depository-eligible transaction, member-to-member or with a customer, must settle by book entry through a securities depository.
• A stock legend restricts transfer or resale. Restricted securities are acquired directly or indirectly from an issuer or affiliate outside a public offering; control securities are held by an affiliate regardless of how acquired.

Which Gotchas Trip Students Up?

• Central handling and control both require no-payment delivery and identifying records. Missing either condition breaks control status even at an eligible location.
• Criminal and noncriminal certificate losses report to the same two places. The certificate's status does not change who receives the report: the SEC or its designee and the registered transfer agent.
• Restricted and control securities are separate categories that can overlap on one certificate. Do not treat the two labels as interchangeable.
• The holding period generally starts at acquisition, not at the decision to sell. A purchase does not start the period until the buyer pays the full purchase price.

One-Breath Recap

Custody and control protect the customer's economic interest in securities the firm holds: safekeeping and segregation keep them safe and separate, control status comes from a recognized clearing, custodian, or omnibus location, and a firm must promptly obtain possession or control of fully paid and excess margin securities, with written authorization or disclosure before lending or borrowing them; independent counts and stock-record verification catch discrepancies, good delivery, DRS, DWAC, and book-entry settlement move a verified position along, and a restrictive legend follows a restricted or control security until the six-month or one-year holding period opens the resale safe harbor, which still does not remove the legend on its own.

Need more than the recap? Read the full Custody and Control of Securities unit.