What is a 'Nominee'
A nominee is a person or firm into whose name securities or other properties are transferred to facilitate transactions, while leaving the customer as the actual owner. A nominee account is a type of account in which a stockbroker holds shares belonging to clients, making buying and selling those shares easier. In such an arrangement, shares are said to be held in street name.
BREAKING DOWN 'Nominee'Nominee accounts are the most common method for holding stocks. Stockbrokers prefer nominee accounts because they cut costs and increase trading efficiency.
How a Nominee Account Works
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 Safety
Although regulators and exchanges periodically check up on nominee accounts' holdings, the process is not performed on a daily basis. Because a stockbroker may move or sell shares from nominee accounts at any time, fraud may occur. This is especially common if a firm is facing insolvency and needs cash or assets to meet liabilities. A stockbroker's records may become altered, increasing the difficulty of determining which investors own assets in a nominee account.
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 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. It is unlikely all the brokers will fail at the same time, and the investor is entitled to more compensation than if he held a nominee account with one broker.
Nominee Accounts and Foreign Stocks
A stockbroker typically does not take direct custody of an investor's foreign securities. The broker uses a third-party custodian, typically a division of a major global bank offering such services. However, some international brokers have local subsidiaries handling custody in some or all of their markets.
Assets the bank holds in custody are segregated from general operations. Although it is possible the global bank may fail, the far-reaching consequences would most likely result in a bailout, protecting the investors' asset values. However, in smaller emerging markets, a custodian without a local division may engage a sub-custodian to hold stock on its behalf. If the sub-custodian faces insolvency, the main custodian may not be liable for the sub-custodian's missing assets.