What is a nominee?
A nominee is a person, company, or subsidiary whose name appears on the title of securities or other property to facilitate custody, settlement, transfers, and recordkeeping while the original investor remains the beneficial (legal/economic) owner. Brokers, custodians, and investment managers commonly use nominee arrangements to simplify trading and safekeeping.
Key takeaways
– A nominee holds legal title to securities on behalf of the beneficial owner; the investor retains the economic rights (dividends, voting where applicable) and ultimate ownership.
– “Street name” holdings and pooled nominee accounts are standard industry practice because they improve settlement speed and lower costs.
– Nominee arrangements generally protect investor assets from a broker’s creditors if the broker becomes insolvent, because the assets are legally segregated from the broker’s balance sheet.
– Risks include recordkeeping errors, fraud, or disputes when a broker or a sub-custodian becomes insolvent; compensation schemes in various markets provide an additional safety net up to set limits.
– For foreign securities, brokers usually use third‑party custodians or sub‑custodians; this adds another layer in the custody chain and another party whose solvency and practices you should understand.
Understanding nominee accounts
– How they work: A broker or an affiliated non‑trading entity holds the legal title to shares in its name (or in the name of a nominee company). The investor is the beneficial owner and is recorded in the broker’s internal ledger; trades are executed at the investor’s instruction.
– Why they are used: Street‑name/nominee holdings speed up settlement, simplify corporate actions (dividends, rights issues), permit easier re‑registration and transfer, and reduce paperwork and operational costs for brokers and custodians.
– Ownership rights: Beneficial owners retain economic rights (dividends, capital gains) and typically the right to receive company communications. The broker maintains records showing which client owns how many shares.
Nominee accounts and investor safety
– Legal segregation: Because the legal title is held by a nominee entity separate from the trading business, investor assets are usually segregated from the broker’s own assets and creditors. This helps protect investors if a broker becomes insolvent.
– Operational and fraud risks: Regulators and exchanges inspect nominee arrangements periodically, but not continuously. If a broker alters records, misappropriates assets, or sells assets improperly (especially under financial stress), proving beneficial ownership can become difficult. Pooled accounts increase complexity because many clients’ holdings are commingled rather than maintained in individually segregated custodial accounts.
– Foreign custody: For international holdings, brokers commonly rely on global custodians or local sub‑custodians. This can increase operational complexity and counterparty exposure; different jurisdictions have different legal regimes for custody and investor protection.
Nominee accounts and investor compensation
– Compensation schemes: Most major markets have investor compensation or protection schemes that pay eligible investors up to a statutory limit if assets are missing and the broker cannot account for them (examples: SIPC in the U.S. for certain failures, FSCS in the U.K.). Limits, eligibility, and coverage differ by jurisdiction—check the rules applicable to your account.
– Diversification of brokers: Investors with large portfolios should consider spreading assets across multiple brokers/custodians because compensation limits are per firm and it’s unlikely multiple major brokers will fail at the same time.
Nominee accounts and foreign stocks
– Custody chain: Brokers often appoint a global custodian (usually part of a large bank) who may in turn appoint local sub‑custodians. Assets held by the custodian should be segregated from the custodian’s own assets, but in practice the chain increases points of operational risk.
– Failures and bailouts: Large global banks holding custody assets are less likely to be left entirely insolvent without a government response; in smaller markets, a sub‑custodian’s failure may cause direct losses and recovery can be more complex. Know where your assets sit and under which legal regime.
Practical steps for investors — a checklist
1. Ask how your holdings are titled
– Confirm whether holdings will be in the broker’s nominee name, an affiliated non‑trading company, or directly in your name. Request this in writing (account terms, client agreement, or a nominee disclosure).
2. Get regular, detailed account statements
– Ensure the broker sends periodic trade confirmations and consolidated account statements showing your beneficial holdings, dividends, and cash balances. Retain these records offline.
3. Know the custody chain for foreign securities
– For foreign holdings, ask who the custodian and sub‑custodians are, and which jurisdictions govern the custody arrangement.
4. Confirm segregation and reconciliation practices
– Ask how the broker/custodian segregates client assets, how often reconciliations between the broker’s records and custodial holdings are performed, and whether an independent auditor reviews those records.
5. Check investor protection schemes and coverage limits
– Identify the compensation scheme that covers your account, understand eligibility criteria, and the maximum compensation amount per firm.
6. Limit counterparty concentration
– Avoid placing all your assets with a single broker/custodian; spread large holdings across institutions to reduce single‑counterparty risk and increase protection across compensation schemes.
7. Consider direct registration for critical holdings
– For high‑value or concentrated positions, consider holding shares directly in your name (direct registration systems, where available) rather than in street name, recognizing this can add administrative steps for trading.
8. Maintain independent evidence of ownership
– Keep trade confirmations, communications from issuers (e.g., dividend notices), and records of transfers. These documents help in disputes or insolvency proceedings.
9. Use reputable, regulated intermediaries
– Prefer brokers and custodians regulated in stable jurisdictions with transparent rules for custody, segregation, auditing, and investor protection.
10. Periodically verify your holdings with the issuer or transfer agent
– For important holdings, check the register (if possible) or ask the transfer agent whether you or your nominee appear as the owner or beneficial owner.
Questions to ask your broker or custodian
– In whose name will the securities be registered?
– Can I receive confirmations and statements showing beneficial ownership?
– Who is the legal custodian or sub‑custodian for my holdings (domestic and foreign)?
– How are client assets segregated and reconciled, and how often?
– Is there independent audit oversight of custody and nominee arrangements?
– Which investor compensation scheme covers my account and what are its limits?
– If a sub‑custodian fails, who is responsible for recovery and what protections exist?
If assets are missing — immediate steps
1. Contact your broker immediately and request a written explanation and documentation (transaction history, transfer instructions).
2. Gather and preserve evidence: trade confirmations, account statements, correspondence with the broker, and any issuer communications.
3. File a complaint with the broker’s compliance department; ask for a written acknowledgment and timeline.
4. Report the issue to the relevant regulator (e.g., securities regulator) and to the investor compensation authority in your jurisdiction.
5. Consider legal counsel if a material amount is missing or you suspect fraud; an insolvency practitioner may be appointed in broker failures and will provide instructions for filing claims.
6. If applicable, submit a claim to the investor compensation scheme following its procedures and timelines.
When to consider holding securities outside a nominee arrangement
– You require direct voting control or want shares registered in your personal name.
– You hold a concentrated or high‑value position and prefer to avoid relying on a single custodian.
– You are uncomfortable with the custody chain or the jurisdictional risks for foreign securities.
Note: Direct registration can complicate frequent trading and may slow settlement; weigh the tradeoffs.
Limitations and jurisdictional differences
– Laws and protections vary by country. Compensation schemes, the enforceability of segregation, and the remedies available after insolvency differ by jurisdiction and custodian. Always check the specific rules that apply to your account and country.
Glossary (brief)
– Beneficial owner: The person who enjoys the economic benefits of ownership even if the security is registered in another name.
– Nominee: The name in which the legal title to securities is registered on behalf of the beneficial owner.
– Street name: Securities registered in a broker’s or nominee’s name to facilitate trading.
– Custodian/sub‑custodian: Institutions responsible for safekeeping securities and executing settlement; may be global or local.
– Investor compensation scheme: A statutory program that compensates investors for losses of assets held by failed intermediaries, subject to limits and eligibility rules.
Final notes
Nominee arrangements are standard and practical for most retail and institutional investors; they reduce costs and speed transactions. However, they introduce operational and counterparty considerations you should understand and manage—especially for large or foreign holdings. Ask clear questions, keep independent records, diversify counterparties when appropriate, and verify the regulatory protections and compensation limits that apply to your accounts.
Source
Content informed by Investopedia, “Nominee” (https://www.investopedia.com/terms/n/nominee.asp). Please check the investor protection rules and custody regulations in your jurisdiction or consult a financial/legal professional for personalized advice.