Why should nominee operators have rights?

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Following a meeting at the BIS Department where I discussed the issues associated with Part 9 of the Companies Act, and our suggestion that all shareholders (including those in nominee accounts) be on the share register of companies, I had some further thoughts on this subject.

On reflection it seems very odd to me that nominee operators (i.e. your stockbroker) have the rights endowed by the Companies Act on shareholders. Investors in nominee accounts have no such rights (voting rights, information rights, rights such as the ability to requisition meetings and other rights) because only the nominee operator has their name on the register as a “Member” of the company.   The only variation of this position that was introduced by the revised Companies Act in 2006 was the ability of the Member (i.e. the nominee operator in the case of nominee accounts) to pass on certain of those rights, if they cared to do so to their clients.

Most investors are now reliant on the goodwill, and indeed administrative efficiency, of their stockbroker to obtain even the meagre rights available. This seems most peculiar if you think about it.

Now many years ago when the Companies Act was being developed it made sense because there was an alignment between the owners of the shares who had a financial interest in the company and those on the register. In general, everyone who purchased an interest in a public company was issued with a share certificate and was listed on the register. It was obviously sensible that those who had purchased an interest got the rights mentioned above. He who pays the piper should call the tune might be a way of putting it.

But now we have the situation where the nominee operator, who is simply providing an administrative service as an intermediary in the investment chain, gets those rights instead of the beneficial owner. This is surely nonsense.  Why should the clerks be getting the rights that an investor is paying for?

In the current topsy-turvy world of stock market trading, the rights an investor should obtain have been diverted and subverted by the stockbrokers in their role as intermediaries. This is surely the key problem that needs to be tackled.  It should be the exact reverse where investors only grant nominee operators the rights arising from investment if they wish to do so (for example if they wish a “wealth manager” to act on their behalf). I would extend that to the rights to receive dividends also.

The best solution to this is of course to have all beneficial owners on the share register of a company as we have already advocated, using the designated nominee system or other arrangement and with a clear record of any assignment of rights.

That way the investors who have paid for the rights would get them, not some interloper in the investment process.

Roger Lawson

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