SEC Form 10-Q

What is a candidate?

A nominee is a person or business on whose behalf securities or other properties are transferred to facilitate transactions while leaving the customer as the beneficial owner. A nominee account is a type of account in which a stock broker holds client-owned stocks, which makes it easier to buy and sell these stocks. In such an arrangement, the shares would be held in the name of the street.

Key points to remember

  • A nominee in financial trading refers to a person or company who has been responsible for the custody of the securities of investors.
  • The nominee company must be a separate third party from the broker itself; all of your investments are held in his name, while you remain in control.
  • The securities are held in trust and the nominee is the legal owner, but you retain the beneficial ownership as the beneficiary.
  • The broker can buy and sell on your behalf, but creditors cannot get your money if the brokerage collapses or your broker tries to swindle you.

Understanding the candidate

Nominee accounts are the most common method of holding stocks. Investment dealers prefer nominee accounts because they reduce costs and improve transaction efficiency.

How a candidate account works

The shares of an investor are legally held by a non-trading subsidiary or a nominee company. The investor is the beneficial owner of the share and has rights over the shares. The securities broker registers all beneficial owners, negotiates according to the instructions of an investor and transmits cash from sales or dividends to an investor.

Since a non-commercial company owns the shares, the assets of an investor are legally separate from the broker’s assets and liabilities. If the broker becomes insolvent, the investor’s actions are protected from creditors.

Candidate accounts and security

Although regulators and stock exchanges periodically review candidates’ accounts, the process is not done daily. Since a stock broker can move or sell stocks from nominee accounts at any time, fraud can occur. This is particularly common if a business is facing insolvency and needs cash or assets to meet its commitments. A securities broker’s records can be changed, which increases the difficulty of determining which investors hold assets in a nominee account.

Brokers generally do not have separate accounts for each individual, but rather pooled accounts of many clients who give them a bigger pot to stir.

Candidate accounts and investor compensation

Most major markets offer investor compensation, covering assets held by a securities broker. Investors are compensated up to a fixed amount if assets are missing from their accounts and the broker cannot offer the difference in cash. Investors with larger market values ​​are encouraged to have accounts with multiple brokers since it is unlikely that all brokers will fail simultaneously, and the investor is entitled to recover more than if the nominee’s account were with one sole broker.

Candidate accounts and foreign actions

A securities broker generally does not directly take over the foreign securities of an investor. The broker uses a third-party custodian, usually a division of a large global bank offering such services. However, some international brokers have local subsidiaries that deal with custody in some or all of their markets.

The assets held by the bank are separated from general operations. Although the World Bank may go bankrupt, the far-reaching consequences would most likely result in a rescue, protecting the value of investors’ assets. However, in small emerging markets, a custodian with no local division can hire a sub-custodian to hold stocks on its behalf. If the sub-custodian is facing insolvency, the primary custodian may not be liable for the missing assets of the sub-custodian.

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