Retirement of Securities

What Is Retirement of Securities?

Retirement of securities refers to the cancellation of stocks or bonds because their issuer has bought them back, or (in the case of bonds) because their maturity date has been reached.

Understanding Retirement of Securities

Many securities are routinely bought back by their issuing company—such as preferred stocks and corporate bonds. In the case of stock, this reduces the number of shares outstanding. In the case of bonds, it means that the company is essentially paying the investors who bought loaned them money their principal back and getting rid of its debt obligations.

Securities that have been bought back in this way are called retired securities. They are effectively canceled, according to Securities and Exchange Commission (SEC) regulations. They cannot be traded, have no market value, and no longer represent a share of ownership in the issuing corporation (in the case of a retired stock), or the extension of a loan to it (in the case of a retired bond).

Assuming the company doesn't overpay for its shares or bonds, these buybacks can help bolster the company's value. It's no longer saddled with paying shareholders dividends on their stock, or interest on their bonds.

Special Considerations

Regulations regarding the retirement of securities were originally set by the Securities Exchange Act of 1934. In 2004, the SEC adopted new rules tightening the processing of canceled securities, in response to a wave of corporate bond and stock buybacks—and a rise in the theft of the canceled securities (specifically, their physical certificates). "In many cases, the stolen certificates have reentered the marketplace either through sales or as collateral for loans, resulting in substantial fraud on public investors, public companies, creditors, broker-dealers, and transfer agents," the SEC noted.

So the SEC made changes to the regulations governing how transfer agents handle canceled stock certificates and bond certificates. The new regulations require every transfer agent to establish and implement written procedures for the cancellation, storage, transportation, destruction, or other disposition of securities certificates.

Transfer agents must mark each canceled securities certificate with the word 'canceled'; maintain a secure storage area for canceled certificates; maintain a retrievable database of all of its canceled, destroyed, or otherwise disposed of certificates; and have specific procedures for the destruction of canceled certificates.

Additionally, the SEC amended its lost and stolen securities rule and its transfer agent safekeeping rule to make it clear that these rules apply to unissued and canceled certificates.

The Value of Retired Securities

Though retired securities have no market value, they often have value to collectors. Not so much contemporary securities, but old bond or stock certificates dating from the 19th or early 20th century. In pre-electronic trading days, paper—your proof of ownership or investment—was important. As if to underscore that, many of these certificates were quite lovely—printed from engraved plates with lavish or colorful illustrations (the stock certificates issued by the Walt Disney Company (DIS) featured its beloved cartoon characters, for example).

Or there's historic interest for some other reason: the first shares of Berkshire Hathaway that bear Warren Buffet's signature, for example.

Most large discount brokerages are able to help clients track down securities that have been defunct for over 10 years. Using the CUSIP number, the brokerage can uncover all splits, reorganizations, and name changes that have occurred throughout the company's history. It can also tell you whether the company is still trading or out of business.

To see if they're retired securities, check if the documents have the word "canceled" imprinted on them, and/or holes punched through the certificate. Often, they're pinhole-sized and barely noticeable—one of the reasons for the SEC's 2004 change in regulations.

If you have an antique or vintage piece of financial paper and want to know more about it, stock search companies such as RM Smythe will do all of the investigation work for you for a fee. Even if the certificate ends up having no trading value, they may offer to purchase it as a collectible.