What Is a Nominee?
A nominee is a person or firm whose name is titled on securities or other property to facilitate certain transactions or transfers while leaving the original customer as the actual or legal owner. In this setup, a nominee can act as a custodian.
A nominee account is a type of account in which a stockbroker holds shares belonging to clients, simplifying the process of buying and selling those shares while ensuring they are kept safe. In such arrangements, the shares are held in a ‘street name.’
Key Takeaways
- In finance, a nominee is a person or company entrusted with the safekeeping of investors’ securities or property; while a nominee holds the investments in their name, you retain actual control.
- The securities are held in trust, where the nominee is the legal owner, but the investor enjoys true ownership as the beneficiary.
- Brokers can execute trades on your behalf, but your funds remain protected even if the brokerage faces closure or fraud.
- The nominee company should be a neutral third party distinct from the brokerage.
Trust and Transparency: Understanding Nominees
Investment advisory firms often employ nominees to secure the assets they manage for their clients. Nominee accounts are the preferred method for holding stocks, primarily because they boost efficiency and reduce costs for stockbrokers. An investor’s shares are legally owned by the broker’s non-trading subsidiary or nominee company. The investor, though, remains the beneficial owner with rights over these shares. The broker records all beneficial owners, processes trades according to investor instructions, and transfers sales revenues or dividends back to the investor.
When a non-trading subsidiary holds the shares, the investor’s assets are legally shielded from the stockbroker’s own liabilities. As a result, if the broker becomes insolvent, the investor’s stocks are secure from creditors.
Nominee Accounts and Investor Safety Measures
Although regulators and exchanges periodically review nominee accounts, these reviews are not conducted daily. Consequently, there is a potential for fraud, especially if a stockbroker faces insolvency and needs to liquidate assets to satisfy liabilities. Stockbrokers generally maintain pooled accounts encompassing the assets of numerous clients to streamline management, but this can sometimes complicate the process of determining individual ownership.
Investor Compensation Through Nominee Accounts
Most major markets include compensation schemes to cover investor assets held with stockbrokers. If any assets are missing and the broker cannot compensate the investor, the compensation scheme steps in, typically up to a specified amount. Larger investments spread across multiple brokers can reduce risk and potentially allow investors to recoup more should missteps occur.
Navigating Nominee Accounts with Foreign Stocks
Stockbrokers don’t usually take direct custody of an investor’s foreign securities. Instead, they leverage a third-party custodian—typically, a major global bank’s specialized division. Some international brokers have local arms for custody services in key markets. Assets maintained in this manner are generally segregated from the bank’s general operations. Despite the risk of a global bank’s failure, systemic importance likely leads to governmental bailouts, safeguarding investor assets. However, in smaller or emerging markets, custodianship might involve sub-custodians, and if these face insolvency, the main custodian may not be liable.
Related Terms: custodian, insolvent, foreign securities, exchanges, safekeeping
