# How Nominee Accounts Protect Your Securities

> **Definition**
>
> A nominee is an individual or firm that holds securities or property on behalf of the actual owner.

## What Is a Nominee?

A nominee is a person or firm named on securities to help with transactions, while the original owner retains legal ownership. In this way, a nominee can serve as a [custodian](https://www.investopedia.com/terms/c/custodian.asp) while the investor remains the beneficial owner.

A nominee account is where a stockbroker holds client shares, aiding in buying, selling, and [safekeeping](https://www.investopedia.com/terms/s/safekeeping.asp). Foreign investments are typically not held by a stockbroker but are instead held by a third party, such as a global bank, to handle custody.

While transaction efficiency and security are enhanced, there are a few risks, such as fraud, that regulations help protect against.

### Key Takeaways

*   A nominee acts as a custodian for securities, holding them in their name but allowing you to retain real ownership.
*   Nominee accounts boost trading efficiency by letting stockbrokers hold shares for clients in a streamlined manner.
*   Legal ownership by a third-party nominee protects your investments if the brokerage faces insolvency.
*   Nominee accounts may pool multiple investors' assets, posing potential risks if the broker mismanages records.
*   Using multiple brokers for nominee accounts can increase protection and compensation for larger investments in case of issues.

## The Role of Nominees in Financial Transactions

Investment advisory firms often use nominees to protect client assets. Nominee accounts are the most common way to hold stocks. Stockbrokers prefer nominee accounts as they cut costs and boost trading efficiency.

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](https://www.investopedia.com/terms/i/insolvency.asp), the investor's stocks are protected from creditors.

## How Nominee Accounts Ensure Investor Safety

Although regulators and [exchanges](https://www.investopedia.com/terms/e/exchange.asp) periodically review nominee accounts, 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.

> **Important**
>
> Brokers don't typically have separate accounts for each individual, but rather pooled accounts of many customers that give them a bigger pot to stir.

## Investor Compensation in Nominee Accounts

Most major markets offer investor compensation, covering assets held by a stockbroker. Investors are compensated up to a set amount if any 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, for it is unlikely all brokers will fail simultaneously, and the investor is entitled to recoup more than if the nominee account was with one broker.

## Managing Foreign Stocks Through Nominee Accounts

A stockbroker typically does not take direct custody of an investor's [foreign securities](https://www.investopedia.com/terms/f/foreign-investment.asp). 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 that 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.

## The Bottom Line

Nominees are important for safeguarding and managing investors' securities—they act as a legal owner while the investor retains beneficial ownership. Nominee accounts are beneficial for optimizing trading efficiency and reducing costs for both investors and brokers, while providing a layer of protection for investors' assets if their brokers face insolvency.

There are some risks when using nominee accounts, including the rare but possible occurrence of fraud, especially during financial distress. With that in mind, it's important to diversify by maintaining accounts with multiple brokers to safeguard against potential losses if one broker faces financial difficulties.