Reviewed by Jan 29, 2021| Updated on
A nominee account is a kind of account in which a broker will hold the shares that are owned by his or her clients, thus facilitating easy selling and buying of shares. In this kind of facility or arrangement, the shares are held in the name of the street.
When it comes to trading in finance, a nominee is someone who is given the responsibility to safeguard the securities held by the investors.
Nominee accounts are generally used to store stocks. Stockbrokers are most comfortable using nominee accounts as they bring down the costs and at the same time provide higher trading efficiency.
The shares of investors are legally held by the stockbroker’s nominee or a subsidiary company that is non-trading. Rights of the shares and the beneficial owner of the stocks are the investors. A stockbroker is tasked with recording all owners (beneficial), places trade orders as per the directions of investors, and passes money from the sale of stocks or the profits received in the form of dividends to the investors.
Since a non-trading company is owning the shares of investors, the investors’ assets are legally different from the assets and liabilities of stockbrokers. If a stockbroker goes onto become insolvent, the stocks of the investors are secured from creditors.
Though regulators and exchanges regularly review nominee accounts, it is not done every day. As stockbrokers might sell or move stocks from the accounts of the nominee at any time, there is a possibility of fraud happening. This is particularly known to happen when a broking organisation is looking at being insolvent and is in dire need of cash and assets to cover its liabilities. The records of a stockbroker may get disrupted, and it may become challenging to find out which investor holds what shares in a given nominee account.