Nominee shareholder
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[1].
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[2]:
- "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.
Nominee account
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[3].
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[4].
- Banks: Banks often act as a nominee shareholder on behalf of their customers. The bank holds the beneficial owner’s shares in a separate account in the bank’s name, and the beneficial owner is the real owner of the shares.
- Brokerage Firms: Brokerage firms are another type of nominee shareholder who hold shares on behalf of their customers. The firm will typically hold the shares in a separate account, with the beneficial owner being the real owner of the shares.
- Trusts: Trusts can also act as nominee shareholders. In this case, the trust holds the shares on behalf of the trust beneficiaries, who are the real owners of the shares.
- Investment Funds: Investment funds are one of the most common types of nominee shareholders. The fund holds the shares on behalf of the fund's investors. The fund is the legal owner of the shares, but the investors are the beneficial owners.
A nominee shareholder offers several advantages:
- They can provide the anonymity to shield shareholders from public scrutiny.
- They can act as a safeguard for the true owners, allowing them to remain anonymous and protecting them from liability.
- The nominee shareholder can also act as a trustee, ensuring that the interests of the true owners are protected and that the shares are managed responsibly.
- They also provide a convenient and cost-effective way for shareholders to manage their investments, as the nominee shareholder does the paperwork and administration associated with the ownership of the shares.
- With a nominee shareholder, the true owners of the shares do not need to be identified in public records, which provides them with greater confidentiality and privacy.
A nominee shareholder is a person/entity appointed to hold shares on behalf of the beneficial or actual owner of the shares. However, there are some limitations to this arrangement, including:
- Nominee shareholders do not have the same rights as the beneficial owner, as the beneficial owner is not the registered owner of the shares.
- The identity of the beneficial owner is often subject to investigation and disclosure under the Companies Act.
- In some cases, the nominee shareholder may be required to transfer the shares to the beneficial owner if requested.
- The nominee shareholder may be liable for any taxes and fees associated with the shares.
- The nominee shareholder may also be subject to certain legal obligations that the beneficial owner would not be subject to.
In addition to a Nominee shareholder, there are several other approaches related to a shareholder’s interest in a company. They are:
- Joint Tenancy - This approach involves two or more parties sharing ownership of the same asset. It allows the parties to have an equal interest in the asset and to pass it on to the other owner in the event of death.
- Tenancy in Common - This approach involves two or more parties owning an asset but with unequal shares. It allows them to pass on the portion they own to their intended beneficiary in the event of death.
- Tenancy by the Entirety - This approach involves two parties sharing ownership of the same asset, but with both parties having an equal interest in the asset. It allows them to pass on the asset to the other partner in the event of death.
- Trust - This approach involves the creation of a trust in which a third party holds assets for the benefit of the trust's beneficiaries. This allows the assets to be managed and distributed according to the trust's instructions.
In summary, there are several approaches related to a shareholder’s interest in a company, such as Joint Tenancy, Tenancy in Common, Tenancy by the Entirety, and Trust. Each of these approaches has its own unique advantages and disadvantages, and should be carefully considered before being implemented.
Footnotes
| Nominee shareholder — recommended articles |
| Bridge Bank — Assignment of insurance — Nominee company — Working interests — Nominee shareholding — Bank secrecy — Share certificate — Mercantile law — Fixed and floating charge |
References
- 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
