Bondholder Communications 101
The topic of Bondholder Communications is poorly understood. Even veterans of the bond market and users of DTC are often surprised by how difficult it is to reach out to other holders. Here are the basics:
1) If you are an Issuer, you have standing to send messages to your investors via DTC.
2) However, when you do so, you will not be able to identify those investors directly, except in limited cases. Instead, you will simply be told which Custodian has investors in your bond and how much of the bond is held. So you might be told that Citi has $10 million, BNY has $20mm, and BAML has $15mm, etc.
3) Each of these custodians will have the contact information of those ultimate beneficial holders, and will pass along messages through back-office operations. But in some cases, they will have the contact information only of sub-custodians, and the sub-custodian will know the beneficial owner. In that case there is another link to the chain.
4) As an issuer, if you send messages through DTC, you will not know if they are received or read by the beneficial holder. There is no visibility between links in the chain.
5) As an issuer, if you send messages through DTC you also will not be able to dialogue with the beneficial owner.
6) If you are “just” an investor and not an issuer, you have no standing to send messages through DTC at all. So it is not possible for investors to find other investors for trading, or to effectively assert rights, via DTC.
7) For structured transactions, the trustee is normally treated as the issuer with the standing to send messages. So if you are an investor in a tranche or the manager of the deal, you must coordinate or negotiate with the trustee to accomplish your messaging. In some cases historically it has turned out that the trustees were not aligned with such parties.
8) There is no accounting or accountability across custodians or through particular custodial chains. So if a message is not delivered or is mis-delivered, there is no way to know. In part this is because no single entity has all of the information. DTC does not know who all the holders are, only the names of the custodians involved in the deal. Each custodian has no information with respect to other custodians.
9) For votes, a medallion guarantee is issued by financial institutions to “verify” status of the signer of a vote. In fact, this verification is usually done by self-affirmation of the signer, and the process is not automated. The deep pockets of the guarantor, rather than any mysterious process, are what establish the power of such a guarantee.
10) Issuers can use third party services to chase down votes (especially in stock proxy situations). These third party services may use inference and experience to guess which holders reside at which custodians, and in this way reverse engineer or track down stock holders in ad hoc calling campaigns.
11) Investors must resort to similar tactics, with the further limitation that they will not have rights to access a custodial list of holders to start, which is a disadvantage.
12) Because there is no accountability across entities or up and down the chain, it is difficult to manage voting situations through the existing infrastructure. Thus agents are appointed to fulfill this clerical function that in a less convoluted institutional setting would be straightforward.
All in all, the functional infrastructure of bondholder communications faces many challenges, especially given the high stakes involved!
