Nominee
What is a nominee?
A nominee is an individual or firm that holds securities or other property in its name on behalf of the actual (beneficial) owner. The nominee is recorded as the legal owner for administrative and transactional purposes, while the investor retains the economic rights—such as dividends, voting (in some arrangements), and proceeds from sales.
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How nominee accounts work
- Brokers commonly use nominee or nominee-company accounts to hold client shares. The broker records which clients are the beneficial owners and executes trades and distributions per client instructions.
- Nominee accounts can be pooled (many clients’ holdings in a single legal account) to improve operational efficiency and reduce costs.
- For foreign securities, brokers often use third-party custodians (typically global banks) or local subsidiaries to hold assets rather than taking direct custody themselves.
Key benefits
- Trading efficiency: Brokers can settle and manage trades faster when securities are held in nominee name.
- Legal separation: Because shares are held by a non-trading subsidiary or nominee company, client assets are generally separate from the broker’s own assets and liabilities.
- Protection in insolvency: Segregation of assets typically means client securities are not available to the broker’s creditors if the broker becomes insolvent.
Risks and limitations
- Pooling and recordkeeping: Pooled nominee accounts rely on accurate broker records. If records are altered or lost—especially during financial distress—determining beneficial ownership can become difficult.
- Fraud or misuse: A broker under pressure may move or sell assets improperly. Regular regulatory review reduces but does not eliminate this risk.
- Sub-custodian exposure: For international holdings, a main custodian may use sub-custodians in local markets. If a sub-custodian fails, recovery may be more complicated and the main custodian’s liability may be limited.
Investor protection and compensation
- Many jurisdictions offer investor compensation schemes that reimburse clients up to specified limits if assets are missing and the broker cannot make good the shortfall.
- Large investors are advised to spread holdings across multiple brokers. It’s unlikely multiple independent brokers (and their nominee arrangements) will fail at once, and compensation limits apply per firm.
Practical tips for investors
- Ask your broker how client assets are held: in nominee name, with a custodian, or via sub-custodians.
- Check investor compensation limits in your jurisdiction and consider spreading large positions across different brokers to stay within those limits.
- Keep your own records of holdings and transaction confirmations to help resolve discrepancies.
- Prefer brokers that clearly segregate client assets and provide transparent custody arrangements.
Conclusion
Nominee arrangements are a common and practical way to hold and manage securities, improving trading efficiency and providing a legal separation between client assets and broker liabilities. They carry some risks—mainly around pooled recordkeeping and sub-custodian exposure—so investors should understand custody arrangements, monitor broker practices, and consider diversification across custodians to reduce risk.