What Is a Nominee?
Let me explain this directly to you: a nominee is a person or firm whose name appears on securities or other property to make transactions and transfers smoother, all while you, the original customer, stay the actual or legal owner. Think of it as them serving as your custodian in this setup.
You'll often hear about nominee accounts, which are where a stockbroker holds your shares to simplify buying, selling, and safekeeping. In these cases, shares are held in what's called street name.
Key Takeaways
- In finance, a nominee is someone or a company entrusted with safekeeping your securities or property; all investments are in their name, but you keep control.
- The securities are held in trust with the nominee as legal owner, while you hold beneficial ownership.
- Your broker can buy and sell for you, but your funds stay protected if the brokerage fails or there's fraud.
- The nominee company must be a neutral third party, separate from the brokerage.
Understanding Nominees
I see investment advisory firms using nominees all the time to protect the assets they manage for clients like you. Nominee accounts are the standard way to hold stocks, and stockbrokers favor them because they cut costs and boost trading efficiency.
Here's how it works: your shares are legally owned by a non-trading subsidiary or nominee company of the stockbroker. You remain the beneficial owner with full rights over the shares. The stockbroker keeps records of all beneficial owners, executes trades based on your instructions, and passes along cash from sales or dividends.
Since a non-trading company owns the shares, your assets are legally separate from the stockbroker's own assets and liabilities. If the broker goes insolvent, your stocks are shielded from creditors.
Nominee Accounts and Investor Safety
Regulators and exchanges do review nominee accounts from time to time, but not every day. A stockbroker could move or sell shares from these accounts anytime, which opens the door to potential fraud—especially if the firm is nearing insolvency and desperate for cash or assets.
Records might get altered, making it harder to figure out who owns what in a nominee account. Remember, brokers usually pool many customers' assets into one big account rather than keeping separate ones for each of you, which gives them a larger pool to manage.
Nominee Accounts and Investor Compensation
Most major markets have investor compensation schemes that cover assets held by a stockbroker. If assets disappear from your account and the broker can't cover the difference in cash, you get compensated up to a fixed amount.
If you have larger stock values, I recommend spreading your accounts across multiple brokers. It's unlikely they'll all fail at once, and this way, you can recoup more than if everything was with one broker.
Nominee Accounts and Foreign Stocks
For foreign securities, a stockbroker typically doesn't hold them directly. Instead, they use a third-party custodian, often a division of a major global bank that provides these services. Some international brokers have local subsidiaries that handle custody in specific markets.
The assets held by the bank are kept separate from its general operations. While a global bank could fail, the fallout would likely lead to a bailout, safeguarding your asset values. But in smaller emerging markets, if a custodian without a local presence uses a sub-custodian, and that sub-custodian goes insolvent, the main custodian might not be liable for the missing assets.
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