The phrase street name securities or "nominee name securities" is used in the United States to refer to securities of companies which are held electronically in the account of a stockbroker or bank or custodian, similar to a bank account. The entity whose name is recorded as the legal owner of the securities is known as the "nominee owner," and that entity has ownership rights in the security. The nominee owner holds those ownership rights on behalf of the true economic owner who is referred to as the beneficial owner. In the US, Cede & Co., a nominee of Depository Trust Company, is typically the largest stockholder of a company. In the US where Cede & Co. is the street name holder, therefore, all beneficial rights such as voting rights and dividends flow first to the nominee holder Cede, and then are passed onward, and ultimately to the beneficial owners. In the United Kingdom this is known as holding shares in a nominee account.
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As well as the terminology differing between countries, the commercial practice also differs from country to country.
The popularity of nominee accounts has increased rapidly since the introduction of Internet share dealing in the late 1990s and in some cases stocks can only be held electronically, such as exchange-traded funds, but holding shares in this way can have disadvantages compared to other methods.
Holding methods
There are three principal ways of holding securities:
As with direct electronic registration, nominee accounts make paperless telephone and internet trading possible with faster settlement periods and lower commissions than certificate deals. They often enable domestic small investors to gain access to derivatives such as warrants and contracts for difference, to exercise various types of order, and to buy shares on margin. There is no risk of loss or damage to certificates. It is also possible to obtain an instant valuation of a whole portfolio. On the negative side the shareholder is tied in to one stockbroker, as opposed to a certificate holder or someone who has direct electronic registration who can pick and choose stockbrokers every time they deal. If the shareholder is unhappy with their nominee service, they have to arrange to transfer the shares out which can be a lengthy process for which there is usually a charge. The lack of a share certificate can also make it difficult to use shares as collateral for a loan.
Because the shares are held in the name of the stockbroker or bank the name of the beneficial owner does not appear on the share register. This means that dividends, shareholder perks, company reports, details of corporate actions and other communications are sent to the stockbroker rather than the beneficial owner. The extent and methods for handling this can vary considerably between brokers. Failure of the stockbroker or bank to pass on shareholder rights and communications to the beneficial owner is one of the major complaints against nominee accounts and is a major reason why activist shareholder organisations such as The United Kingdom Shareholders' Association are opposed to their use. During 2006 the UK government passed an amendment to the Companies Act 1985 which gave nominee shareholders more rights.
The anonymity of nominee accounts does benefit individuals who wish to hold shares in controversial companies. This has proved useful in situations where investors on share registers have been threatened by animal rights protestors, such as Huntingdon Life Sciences and GlaxoSmithKline. As a consequence, the protestors have been known to intimidate the employees of the stockbrokers instead in order to try to force the companies to stop handling the shares.
In the United States
Regarding nominees who are the registered owners of securities, the controlling legislation for the basic nominee relationship is Article 8: Investment Securities of the Uniform Commercial Code as amended, which was enacted by the State legislatures.
Article 8 provides for a system of heavily-intermediated securities holding where transfers are by a series of book-entries and stock certificates are registered in the name of a designated nominee entity. This nominee must issue proxies to the beneficial owners of the stocks in order for these beneficial owners to have a right to vote in stockholders' meetings.
In the United Kingdom
It is not normal practice in the UK for nominees to arrange for copies of accounts and other shareholder communications to be sent to the beneficial owners of the shares. The UK Shareholders Association has published a list of the disadvantages for UK customers of nominee accounts compared with certificated ownership or direct electronic ownership (CREST). [2]
Because investment firms offering nominee services are the legal owners of the shares, there remains a risk of improper behavior causing the shares to be lost. For example, the investment firm may use the shares it holds for short selling transactions and be unable to replace the shares if the investment firm becomes insolvent. The UK Financial Services Compensation Scheme [3] compensates investors on the failure of an investment firm. However the limit in June 2015 stood at only £50,000 per person per investment firm [4] and losses above this amount would not be covered. This risk of the shares being lost through malfeasance does not apply when the shares are held by the investor in certificated form.