HOLDRs

HOLDRS (Holding Company Depositary Receipts)

Exchange-traded receipts representing beneficial ownership of a fixed basket of common stocks in a particular sector or industry. Owners of these securities can choose to have HOLDRS converted to the underlying stocks so that individual shares can be sold. Stocks represented by HOLDRS are selected prior to the initial issue of HOLDRS and remain unchanged except for unusual circumstances such as corporate mergers and spinoffs. HOLDRS are originated by Merrill Lynch and traded on the American Stock Exchange.

Case Study Unlike mutual funds and most unit trusts, HOLDRS represent beneficial interest in the underlying stocks. As such, owners of HOLDRS are entitled to receive dividends, annual reports, proxy statements, and other correspondence from each firm included in the portfolio represented by a particular class of HOLDRS. Owners of HOLDRS are also permitted to vote on corporate affairs of firms whose stocks are included in the HOLDRS portfolio. Agile Software Corporation, a firm whose stock traded on the New York Stock Exchange, became concerned with the expense of servicing all of its new shareholders who owned B2B Internet HOLDRS. Agile had approximately 15,000 shareholders prior to the creation of the B2B HOLDRS in which the firm's stock was included. Creation of the HOLDRS caused Agile to incur the additional expense of servicing nearly 50,000 additional shareholders. In April 2001 Agile Software filed a federal lawsuit seeking to force the American Stock Exchange, Bank of New York (the trustee for HOLDRS), and Merrill Lynch (originator of HOLDRS) to pick up Agile's expense of servicing the additional shareholders. Agile claimed that all three of these companies were earning a profit from HOLDRS and should be responsible for the expenses of servicing its owners.

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Holding Company Depository Receipt

Shares in several publicly-traded companies packaged together and traded as if they were one stock. HOLDRs are printed on one stock certificate. HOLDRs are put together in situations where some stocks pay higher dividends, while others have the higher potential for appreciation. They were created and are administered by Merrill Lynch, and trade on the American Stock Exchange. HOLDRs exist in many different industries.