INTRODUCTION

Banks, insurance companies, mutual funds and brokers hold a large percentage of the country's stock registered in the names of nominees. Nominee registration has been used throughout the better part of this century and during that time almost all of the state legislatures have adopted statutes permitting the registration of securities, both stocks and bonds, in the name of a nominee. State laws taxing the transfers of stock have long accepted the existence and necessity of the nominee by granting exemptions from the tax on stock transfers between nominees and the beneficial owners.

In spite of this general acceptance of the nominee, it is evident that some confusion persists regarding its use and function. The purpose of this booklet is to explain the role of nominee registration in the operations of financial institutions, with specific attention to New York Clearing House Banks.

WHAT IS A NOMINEE?

A nominee is an individual, partnership, or corporation whose sole function is to provide a name in which to register stocks, bonds, or other securities on behalf of the beneficial owners or agents of the beneficial owners. Usually, and particularly in a bank, the nominee is a partnership-for reasons of continuity (the death or absence of one partner does not affect the ability of others to transfer stock registered in the partnership name). Individual nominees are rare, and corporate nominees are normally used only to hold foreign securities where required by law.

In creating partnership nominee-which may, and usually does, represent hundreds of separate accounts-a bank chooses certain of its officers or senior clerks to act as partners. The bank then signs a contract with the partnership designating it as a nominee and empowering it to act according to bank instructions. A typical nominee agreement might read in part:

"The partnership shall not nor shall any individual partner have or claim any beneficial interest or any interest whatsoever in any stocks, bonds and other

securities or property at any time held in the name of the partnership... No partner shall have any power to undertake any obligation on behalf of the partnership, except upon the direction of (The Bank).

Each partner shall have the right to sign the firm name to assignments, agreements, dividend and interest orders, income tax returns, receipts, proxies, releases and all other documents which the firm may be required to execute in the course of its business, but subject always to the provisions of the preceding paragraph."

Thus, the nominee is little more than a name. It is the holder of record of securities, it has no beneficial interest in the stocks or bonds and can take no action that the bank cannot take. The bank is liable for any loss occasioned by the acts of its nominees, and its use of nominees in no way affects its fiduciary or contractual responsibilities to its customers.

WHY A NOMINEE RATHER THAN

BENEFICIAL OWNER?

Basically, because it saves an enormous amount of time and effort in handling what would otherwise be a staggering amount of paperwork.

Banks serve their customers in many ways. They are trustees for living trusts, testamentary trusts, and employee pension funds. They are executors for estates. They have clients to whom they offer investment advice. Additionally, they are retained under contract to act as custodians for corporations, charitable institutions, other financial institutions, and individuals. As a custodian the bank simply holds and services the securities, but exercises no investment responsibility or other powers associated with ownership.

If it were not for the nominee system, the purchaser (and ultimately the transfer agent) of any security registered in the name of a corporation, charitable institution, or bank would have to determine that the institution-and the persons acting for it-were, in fact, authorized to sell the securities and could legally endorse the certificate on behalf of the institution. Documenta

tion that would require validation might include corporate resolutions, corporate by-laws, certificates of incumbency, and stock powers.

Even more complicated would be the handling of securities registered in the names of trusts and estates. Here the validation of authorized endorsers might require the examination of wills, probate certificates, death certificates, or court certificates of appointments for each sale, obviously a costly and very time-consuming procedure for brokers and transfer agents.

Under the nominee system, the sponsoring bank, rather than the purchaser, assumes the responsibility of determining that its customer, be it a corporation or trust, is in fact authorized to sell the securities. The purchaser or transfer agent need only insure that the stock certificate, registered in the name of a bank nominee, is properly endorsed by the nominee. Lists of nominees as well as lists of authorized signers are published regularly to facilitate this procedure. A machine imprinted facsimile signature, as illustrated below, or a facsimile signature manually guaranteed replaces the vast amount of paperwork that would be necessary if the securities were registered in the name of the beneficial owner.

Another advantage of the nominee system is that, by making this paperwork unnecessary, it speeds the settlement of sales, thereby enabling the delivering party to receive the dollar proceeds of a sale promptly. A secondary benefit of this prompt settlement is the reduction of delivery fails which can spread with a multiplier effect throughout the financial community.

An additional advantage is the more efficient distribution of dividend income. By using the same nominee for more than one beneficial owner, the total effort required to distribute dividend income from the corporation to all of the beneficial owners is substantially reduced. The corporation simply pays a single dividend check to the nominee, and the bank then distributes the income according to the specific instructions of each of the beneficial owners. If the shares were registered separately in the name of each beneficial owner, much more record-keeping and dividend processing would be required by the corporation or its transfer agent.

WHAT ARE THE LIMITATIONS

OF THE NOMINEE SYSTEM?

The major limitation is that it introduces a third party between the beneficial owner and the corporation. However, the corporation can still communicate effectively with its shareholders, because banks will normally go to considerable lengths to assure that corporate communications addressed to their nominees do reach the beneficial owners. But the corporation cannot readily identify the beneficial owners of its stock, nor can others, without obtaining such information from the nominees. The nominees will usually not provide the identity of beneficial owners without first obtaining their consent.

WHO "CONTROLS" SECURITIES

HELD IN BANK NOMINEE NAME?

While the nominee is the holder of record of the securities it is important to understand that the nominee does not extend the authority of the bank. The bank is always acting under some limitations. In the case of trust accounts, the bank authority is limited by the fiduciary agreement; in the case of custody or investment advisory accounts the bank is limited by a contract or agreement with the principal for whom it is acting.

The issue of control might be clarified by examining the powers and rights involved regarding the categories of investing, voting, and receiving income from securities registered in the nominee name.