Understanding Nominee and Nominee Accounts

What Is a Nominee?

A nominee is a person or firm whose name is titled on securities or other property to facilitate transactions or transfers while leaving the original customer as the actual or legal owner. A nominee can also serve as a custodian.

A nominee account is a type of account in which a stockbroker holds shares belonging to clients, making buying and selling easier and for safekeeping. Shares in a nominee account are held in street name.

Key Takeaways

• In finance, a nominee refers to a person or company entrusted with the safekeeping of investors’ securities or property; all of your investments are held in its name, while you retain control.
• The securities are held in trust, and the nominee is the legal owner, but you hold real ownership as the beneficiary.
• The broker can buy and sell on your behalf, but your funds are protected if the brokerage goes out of business or your broker tries to swindle you.
• The nominee company should be a neutral third party separate from the brokerage itself.

Understanding Nominees

Investment advisory firms use nominees to safeguard the assets they manage for clients. Nominee accounts are the most common method for holding stocks. Stockbrokers prefer nominee accounts because they reduce costs and increase trading efficiency.

An investor’s shares are legally owned by a stockbroker’s non-trading subsidiary or nominee company. The investor is the stock’s beneficial owner and has rights over the shares. The stockbroker records all beneficial owners, trades according to an investor’s directions, and passes cash from sales or dividends to an investor.

Because a non-trading company owns the shares, an investor’s assets are legally separate from the stockbroker’s assets and liabilities. If the broker becomes insolvent, the investor’s stocks are protected from creditors.

Nominee Accounts and Investor Safety

Regulators and exchanges periodically review nominee accounts, but not on a daily basis. Stockbrokers may move or sell shares from nominee accounts at any time, creating opportunities for fraud, especially when a firm faces insolvency. Altered records may complicate determining which investors own assets in a nominee account.

Brokers don’t typically have separate accounts for each individual but rather pooled accounts of many customers.

Nominee Accounts and Investor Compensation

Most major markets offer investor compensation, covering assets held by a stockbroker. Investors are compensated up to a set amount if any assets are missing from their accounts and the broker cannot offer the difference in cash. Investors with larger stock values are encouraged to have accounts with multiple brokers to recoup more than if the nominee account was with one broker.

Nominee Accounts and Foreign Stocks

A stockbroker typically does not directly custody an investor’s foreign securities. The broker uses a third-party custodian, typically a division of a major global bank. However, some international brokers have local subsidiaries handling custody in some or all of their markets.

Assets held in custody by the bank are segregated from general operations. If the global bank fails, a bailout is likely, protecting the investors’ asset values. In smaller emerging markets, a custodian without a local division may engage a sub-custodian. If the sub-custodian faces insolvency, the main custodian may not be liable for the missing assets.