Nominee Services

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When you are choosing a financial entity to help you buy and sell investments, cost is not the only consideration. Traditionally when you bought shares or funds, you would be the registered owner and received a printed certificate confirming this. This would have meant that your name appears on the share register, ensuring you can vote during a shareholders’ meeting.

However, in case of overseas shares the certificate system requires you to send your certificate to the financial entity before being able to sell the shares, which makes dealing cumbersome and expensive since it also means more administration work for the entity. This procedure however does not apply to the sale of local shares on the Malta Stock Exchange.

Many financial entities licensed to provide investment services may be able to buy and sell investments on your behalf, and register such investments in their own name. This service is called “nominee”. Financial entities will generally register your investments in “pooled nominee accounts”.

 

While the certificated form was the traditional way of holding investments, pooled nominee accounts are now by far the most common. Nominee accounts allow investors to own investments (such as shares, bonds, or funds) without becoming involved in any of the associated administration or paperwork. The benefit to customers is that the process to trade (buy and sell) investments is faster, simpler and most often cheaper.

Nevertheless, the fact that the investments are recorded in the name of the financial entity means you will have to get its authorisation to trade your securities. In other words, you cannot sell an investment which you purchased from entity A through entity B without having obtained authorisation from entity A. Most of the times, if you are unhappy with the services received from a particular entity and wish to transfer out of its nominee account to another firm, without selling your existing investments, you will usually be charged for this.

When you accept to use nominee services offered by your investment firm, your investments would be legally owned by your financial entity.

While the entity would become the legal owner of the investments, you would still remain the beneficial owner, meaning that you have rights over them. Your entity will keep records of which client is the beneficial owner of all the investments held under nominee.

When you receive the contract note, which is a document issued by your intermediary indicating the price at which the investment has been purchased and any charges incurred, you are most likely to notice – along with your name and address - a reference such as “[name of the financial entity] nominee Account (or a/c)”. That means that your holdings are held under nominee. Nevertheless, the financial entity cannot trade the investments without your prior written consent (or as agreed in the terms and conditions by yourself and the entity).

Let’s assume that this is the first time that you will be buying an investment through a firm which offers nominee services. First, you need to sign a nominee agreement with your intermediary which lays out how it will conduct its business with you whenever you want to buy or sell investments using its services.

Before buying or selling an investment, the entity would normally require your confirmation in writing (especially if your instructions were first given verbally, such as by phone). This can be done by e-mail (if an e-mail indemnity is in force) or through other means acceptable by the financial entity.

When you pay for the transaction, the financial entity will deposit the amount in a Clients’ Account. This is a bank account which the firm uses to channel all funds relating to investments belonging to investors. It is normally a pooled account – that is, all investors’ monies would be placed in such an account. However, the financial entity will also have an investment account in your name and at least once yearly, the firm is obliged to give you a breakdown of any incoming or outgoing funds specifically related to your transactions as the beneficial owner of the investments.

Any income from investments will be sent to the financial entity, which will then be distributed to the beneficial owners by cheque, credited to an account or reinvested, depending on the beneficial owner’s instructions.

Nominee accounts are designed to facilitate trading of investments as entities can conduct transactions electronically. This means that investments held in nominee accounts can be processed much more efficiently.

Many entities now provide their clients with an online trading system which gives the beneficial owner the opportunity to trade outside the opening hours of their entity in the comfort of their own home.

You may ask the financial entity for such information directly.

If you want to verify such information, go to MFSA’s website: www.mfsa.com.mt. Click on Licence Holders (top menu) and input the name of the financial entity. Click on the name of the financial entity which appears under “Investment Services”.

Have a look at “Category of Licence”. If the financial entity is authorised to provide nominee services, it would have either a Category 2 or Category 3 licence. Our website would include either of the following statements (the bold part is most relevant as it indicates that the entity can provide nominee services):

Category 2 - Licence Holders authorised to provide any Investment Service, and to hold or control Clients’ Money or Customers’ Assets, but not to deal for their own account or underwrite.

OR

Category 3 - Licence Holders authorised to provide any Investment Service, to hold and control Clients’ Money or Customers’ Assets, and to deal for their own account or underwrite.

Many investors don’t understand exactly know how their investments are held and what the risks to their account are if the worst happens. Unless you have been informed otherwise, your account is almost certainly a pooled nominee one. This means that the legal owner of the shares is your entity and your investments are aggregated with those of other investors dealing with the entity.

Put like that, it may sound quite alarming but you should not worry too much because there are legal systems in place to safeguard your holdings and money.

The MFSA’s rules clearly stipulate that your investments should be held separate from those of your financial entity. Nominee accounts are “ring-fenced” (that is, they are held separately) from the entity’s business accounts – so you should not worry that your investments are being combined with those belonging to the entity.

The separation between clients’ investments (and monies) and the entity’s investments (and monies) is crucial to how this arrangement operates. This is however not the only requirement, the rules also require the entity to keep proper records of each customer’s investments such that they are easily identifiable from the investments of other clients, also held under nominee.

Furthermore, the law stipulates that in the case of liquidation of a financial entity (the process which ensues after a company is declared insolvent), the creditors of that entity shall be unable to claim or demand any right of action on or against the investments held under the control of such entity for and on behalf of and in the interest of any of its customers. In the event of any such insolvency or bankruptcy, the entity shall – on request of the customer or the Authority – immediately transfer the control, possession and title to all assets held by or in the name of an investor to another entity or to such other person as may be instructed by the customer or the Authority.

The MFSA’s rules state that at least once a year, a financial entity that holds instruments or money on behalf of investors is required to send, to each of its clients (the beneficial owners of investments), a statement of those investments and money. This statement would usually be sent by post. The entity may also provide beneficial owners with periodic statements but that’s up to you to request such additional service. Many entities nowadays provide their clients with electronic access to their accounts as well so they can see how their portfolio is performing online.

What we have discussed so far applies to both local and foreign investments acquired through a local financial entity offering nominee services.

When you acquire foreign investments, your local entity would usually have a nominee account with a foreign entity which registers such investments in the name of the local financial entity. The foreign entity would not normally know who the beneficial owners of the investments are (i.e. the local entity would not provide details of the names of who owns the investments – although it could be asked to do so by the foreign entity).

However, there is still an important aspect which you need to keep in mind. Although physically, investments are no longer available in paper format (the printed certificates referred to above), there would still be the need to keep a proper and up-to-date register of all holdings. When it comes to foreign investments, this register is usually maintained by a “custodian”, typically a division of a major global bank. Obviously, the investments held in custody by one of these banks are segregated from those which it owns. The “Custody Fee” is the fee which is payable to such bank for keeping a proper register of the foreign investment.

Normally, and depending on the type of investment, custody banks operate in reputable jurisdictions that give top protection to clients’ holdings. If you are unsure about the level of protection in other jurisdictions, ask your financial entity for more information.

Transfer of assets to the rightful heirs in case of death of the beneficial owner should not be a complicated process and should be similar to the process followed had the investment been held directly in the name of the investor.

Obviously, how and in what manner the process may evolve for the surviving spouse or the universal heirs also depends on whether the beneficial owner has provided for a legal will or dies intestate.

In the case where an investment is held in countries where probate applies, if the investment is held in the name of the financial entity under nominee, then the heirs will not go through the process of probate. It is highly recommended that in such cases, heirs seek the advice of a professional person, such as their notary, who can guide them accordingly. 'Probate' is the term commonly used when talking about applying for the right to deal with a deceased person's affairs or administering the estate of a deceased person.

Probate has and still causes many heirs to investments a major headache as it is an expensive process and usually takes time - therefore holding foreign investments with a local financial intermediary might be advantageous to local investors.

There might also be tax matters which one needs to consider in such circumstances and therefore it is recommended that one seeks professional advice from a competent person to deal with any issues that may arise in this area.

 



Last updated: Sep 07, 2016

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