The introduction of T+3 may have been far from popular among US companies but many are now taking up the quid pro quo offered by the SEC in exchange for faster settlement. That is, they are exploiting the opportunity to launch open availability or direct investment plans (Dips) for private shareholders.
A major concern about the introduction of T+3 (see Investor Relations, June 1995) was that it would move private investors into street names, making tracking and communicating with them virtually impossible. But when the SEC issued its T+3 guidelines last year, it also introduced exemptions from Rule 10b-6, which freed transfer agents to work with corporate issuers to offer original issue direct purchase plans to new shareholders for the first time.
That means issuers can give first-time holders the choice of buying – and selling – shares directly from the corporation through its transfer agent. For shareholders, costs vary according to how much of the dealing charges the companies pass on – if any – but they are always less than through a broker. Indeed, the reduced fees mean that direct stock purchases could rival mutual funds in terms of cost-effectiveness for the shareholder; and the transfer agents can make their lives administratively easier by offering dividend reinvestment, automatic debiting from bank accounts, payroll deductions, and so on.
According to Steve MacQuarrie, president of transfer agents BancBoston State Street Investor Services, companies most likely to establish these programmes are those with a clearly defined target constituency. ‘These include utilities, for instance, which can market programmes to customers,’ says MacQuarrie. ‘And we are finding a tendency to concentration of programmes in certain industry sectors. Exxon, for example, launched a programme targeted at its credit card holders and now other energy companies have followed suit.’
There are currently more than 60 plans in existence, but the transfer agents are encouraging more and anticipate rapid growth in the next year or so. It’s good business for the agents, of course, but their sales story is music to the ears of companies seeking loyal stockholders. Exxon has added more than 200,000 shareholders since putting its plan in place, for example. ‘Companies can also raise significant capital very cost-effectively through these programmes,’ notes MacQuarrie, ‘without having to pay expensive investment bankers’ or underwriters’ fees.’
First Chicago Trust Company, the country’s largest commercial transfer agent, is equally gung-ho. James Volpe, vice president, offers a whole list of benefits for companies and shareholders alike. He notes that it’s cheaper for the issuer to communicate with a shareowner on its books than with one on a broker’s books. ‘And directly registered investors provide valuable support for many companies: as customers and as an important voice in regulatory issues,’ Volpe says.
He also believes that retail stockholders are more confident about having their ownership reside on the books of an issuer. ‘There is more stability, reliability and confidence in relation to an issuer than a broker, and individuals find it less intimidating. It offers an alternative to the punitive steps being implemented by brokers, such as high transaction fees, inactive account fees and odd-lot transaction premiums.’
But what of the companies which have actually instituted these programmes? According to Jack Eversull, investor relations VP at Dallas-based Atmos Energy, his company’s plan has been a great success.
Atmos operates natural gas companies and has let its 650,000 domestic customers know about its direct investment plan by sending fliers out with gas bills. ‘Our goal is to attract loyal individual shareholders,’ Eversull says, ‘They help build long-term stability.’ Before Atmos first launched a restricted plan three years ago, it had 6,800 shareholders and was 50 per cent institutionally owned. ‘Today we have 22,000 shareholders, and institutions are down to about 19 per cent.’
Atmos relaunched its plan in January after the rule change and has added 6,000 new shareholders since. Not all are customers; other shareholders hear about the plan via the NAIC, of which Atmos is a corporate member, or from personal investment magazines. Purchases made under the plan are commission-free; and other features include a 3 per cent discount on reinvestment shares, weekly investments, the opportunity to make gifts of shares under the plan, and a no-fee individual retirement account. The minimum initial investment is $200 but after that they can invest as little as $25 a time.
Another Texas company, Dallas-based Tenneco, has responded to the SEC rule change by relaunching its plan to allow new shareholders to sign up for stock through its transfer agent. ‘Our objective is to enlarge our support base by attracting customers and suppliers to our stock,’ reports Jack Lascar of Tenneco’s IR department. ‘Individual shareholders tend to be supportive of management, but our shareholder base has recently become more dominated by institutions. We want to redress the balance.’
In Lascar’s view, one of the most valuable aspects of these plans is that they give shareholders the option of depositing their certificates with the transfer agents, who run a book-entry system on behalf of their corporate clients. That means shareholders don’t have the problem of keeping track of the paperwork, and the company saves the costs of issuing and mailing certificates.
Despite Lascar’s enthusiasm, Tenneco has not yet actively marketed its plan because its launch coincided with a stock repurchase programme. ‘But even without marketing, it has attracted several hundred new shareholders who have heard of it by word of mouth or by reading about it. The word is spreading quickly.’
