|Methods and techniques|
A nominee shareholder is a member of a company who holds the shares on beneficial owner’s or actual owner’s behalf. They are registered owner of the shares and they hold the securities under a custodial agreement. An identity of the one with the true interest is a subject to an investigation and disclosure under the Companies Act.
Terms: “shareholder”, “holder” or “member of a share” are interchangeable and they mean the one whose name is registered in the register of members in the company (i.e. a person with legal title to the shares). Therefore, these phases exclude person who only has a:
- "beneficial interest in a share (e.g. beneficiary under a trust or persons holding shares through nominees); or
- purely economic interest in a share (e.g. through dividend payment rights contractually agreed between that person and the legal registered owner)".
Providing shareholding nominee is restricted to licensed professionals only. As per the Financial Instruments Market Law (FIML), Article 125, only a credit institution, licensed intermediary or a brokerage company which is a professional joint participant in securities market in Latvia has legal right to provide nominee shareholding services and own a nominee account. Therefore, a nominee account is the account where a client’s shares are held by stockbroker. It allows selling and buying these shares easier.
A nominee account is operated by the Central Securities Depository and it is a special kind of securities account. Such kind of account has to be indicated as nominee account and there must be included identification of account’s owner. In addition, a nominee account’s owner is obliged to maintain records of the shares held on the account as well as perform Customer Due Diligence (CDD) measures following the Law on the Prevention of Money Laundering and Terrorism Financing (AML Law). Owners of these kinds of accounts are persons obliged under the AML Law. Therefore, they are required to identify their customers, which are the ones on whose behalf they hold the securities. In addition they are obliged to perform Customer Due Diligence at the time of establishing the business relationship in every case. Generally, the beneficiary owner is defined as natural person having legal or real, indirect or direct control of an entity holding together with other people, financial interests in or voting rights for that legal person of above 25%. The nominee shareholder is further obliged to conduct constant monitoring in order to ensure validity of the information held on the client and to keep it for additional five years following business relationship termination. Nominee account is the most commonly used method for holding stocks. These accounts increase trading efficiency and reduce costs.
Although exchanges and regulators review nominee accounts periodically, these checks are not performed on a daily basis. A stockbroker might sell or move shares from nominee accounts at any time and therefore, fraud may occur. Such a case happens usually if an entity is facing insolvency and there is a need for assets or cash to meet liabilities. Records of a stockbroker might be modified and consequently increase difficulties of determining which investors’ assets are owned on a nominee account.
Foreign Stocks and Nominee Accounts
Generally, a stockbroker does not hold direct custody of foreign shares of an investor. They usually use a third-party custodian, particularly a global bank’s division offering such services. Nevertheless, some of the international brokers have local branches handling custody several or all of their markets.
- Nominee Law and Legal Definition, 2019
- Capital Markets Legal Update, 2013, p. 2
- Global Forum on Transparency and Exchange..., 2015, p. 32-33
- Harrison, D., 2002, p.178-180
- Arnold, G. (2012), The Financial Times Guide to Investing: The definitive companion to investment and the financial markets, Pearson UK
- Capital Markets Legal Update, (2013), "Mayer Brown"
- Harrison, D., (2002), The First-time Investor: The Complete Guide to Buying, Owning and Selling Shares, Pearson Education
- Nominee Law and Legal Definition(2019), "US Legal"
- OECD, (2015), Global Forum on Transparency and Exchange of Information for Tax Purposes Peer Reviews: Latvia 2015 : Phase 2: Implementation of the Standard in Practice, OECD Publishing, Paris
Author: Klaudia Słota