Who Really Owns Your Stocks and Bonds?
Adrian C. Spitters FCSI®, CFP®, CEA® President, Author, Private Wealth Advisor
I Execute Tax-Efficient Investment Portfolio Solutions So That Your Business, Family, And Estate Assets Are De-Risked And Protected Against Financial Risk, Economic Threats, Inflation And Higher Taxes.
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The Fine Print on Investment Ownership Rights
As individual investors, we often assume we have full ownership rights to the stocks, bonds and other securities held in our brokerage and retirement accounts. However, the legal reality of modern security ownership is more complex. Due to dematerialization and the rise of intermediaries over recent decades, individual investors technically own "security entitlements" rather than direct title and control.
This means your ownership rights are subordinated to other parties, like clearing corporations and financial intermediaries, in the event of default or bankruptcy. It also gives certain "senior creditors" - notably major banks and hedge funds holding substantial derivatives positions - priority access to recoup their losses ahead of individual investors.
How Did This Happen?
Over decades, laws and regulations have gradually redefined securities as book-entry accounting ledger items rather than physical share certificates you hold directly. Much of this stems back to efforts starting in the late 1960s to "immobilize" securities certificates in central depositories like the Depository Trust Company (DTC).
While more efficient in some ways, this centralized and layered custodial system separates legal ownership from beneficial economic interest. As explained by attorney David Weisberger, individual investors have "security entitlements against the intermediaries with whom they transact, not outright control and title."
The Hidden Risks
These indirect ownership rights come with notable downsides that retail investors rarely consider. UCC Article 8 is clear – your entitlement claims are subordinate if financial intermediaries or clearing agents face insolvency or default.
In practice, this means major banks, hedge funds, and other “senior creditors” with huge derivative exposures get first dibs on recovering collateral like stocks and bonds. The sheer scale is staggering – over $700 trillion in notional derivatives contracts outstanding globally based on BIS data.
To put this risk in perspective, the notional value of all global equities is around $100 trillion. Yet opaque OTC derivatives markets are 7 times larger, creating extreme hidden leverage in the system.
How Banks Expanded Control
The priority rights of banks and other derivatives counterparties were greatly expanded under changes to the Federal Deposit Insurance Act made during the fallout of the 2008 crisis.
Buried in legislation like Dodd-Frank were provisions establishing “qualified financial contracts” (QFCs) with special legal protections. This includes repos, swaps and various commodity and securities contracts. QFCs cannot be quickly wound down during bankruptcies and essentially let derivative counterparties jump ahead of other creditors.
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How to Protect Yourself
While the big picture may seem bleak, individuals still have options to minimize risks. Seeking direct registration of securities, holding physical certificates when possible, and diversifying across institutions can help strengthen legal ownership claims beyond mere entitlements.
Owning hard assets outright without financial intermediation can also avoid counterparty dangers. Spreading risks across different asset classes and global jurisdictions is prudent, given rising systemic fragility.
Closing Perspective
Ultimately, we must advocate reforming the system and realigning incentives for stability over unchecked speculation. But prudent investors should also take sensible steps to retain control rights over hard-earned savings.
If you are concerned about the ownership structure of your investment portfolio and want to learn more about Webbs's research and potential solutions, don't hesitate to contact me at aspitters@pfcwealthsolutions.com or use my Calendly Link.
Watch The Video:
You can find my review of Part 1 on LinkedIn Here: Untangling the Complex Web of Legal Structures in Financial Ownership
Join the conversation (FREE): The Great Taking: A Deep Dive Into Who Actually Owns ‘Your’ Wealth
Continuation to part 2 found here: The Great Taking: How To Protect Your Shares and Bonds (Private)
Missed Part 1? (Free): Great Taking Part 1 (Public Content)
Continuation to Part 1 found here: The Great Taking: Solutions For Part I (Private)
The original David Webb interview that kicked this research off is found here:
Additional Resources:
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