SEC Releases Rule on Registration for Nominee Function
The Securities and Exchange Commission (SEC) has released new rules for firms operating as nominees.
The new rules require all persons not registered by the commission as custodians, carrying on the business of nominee and holding securities including equities, money market and fixed income securities, derivatives, among others, except pension assets, on behalf of actual owners to apply for registration.
According to the rules, the business of the nominee shall be to take title of property, money or securities in trust for and on behalf of clients as nominee for, or representative of such clients, to hold and deal with such property, money or securities strictly in accordance with any directions given by the respective clients from time to time to the nominee company.
The rule also stipulates that a nominee shall not engage in any business or activity except the business of nominee companies described above.
A nominee is a company formed by a bank or other financial institution for the purpose of holding securities and other assets and administering them on behalf of the actual owners under the terms of a custodial or nominee agreement.
The rule prescribes that a Nominee company shall have minimum of three sponsored individuals, one of whom shall be a compliance officer; the managing director of the company shall at all times be among the sponsored individuals by complying with the requirements for registration of sponsored individuals; a nominee company shall have necessary infrastructure, including vaults for safe custody of title documents, agreements etc. and information technology capability required to effectively discharge its functions.
In terms of code of conduct, SEC stated that a nominee company shall abide by the Code of Conduct for capital market operators and their employees as set out in the Commission’s Rules and Regulations.
In addition, it stated that any person registered by the commission as nominee shall not carry out any business except the business of nominee prescribed in these rules; not invest in securities; and have a robust risk management procedure and mechanism for compliance with anti-money laundering/combating financing of terrorism (AML/CFT) regulations of its parent company.
In the case of merger/acquisition, they are required to notify the clients, who shall reserve the right to appoint another Nominee company or elect to remain with the new entity.
“Within 24 hours, in the event that its registration is suspended /revoked, notify all its clients including custodians of the suspension/revocation and their obligation to appoint another nominee company within 90 days from the effective date of suspension/revocation.
“Where any client fails to appoint another Nominee, the Commission shall appoint another Nominee to take-over custody of the assets.
“In the event of a decision by the Nominee company to discontinue business, notify the commission and its clients within 24 hours.
“The nominee company shall notify the clients of their obligation to appoint another nominee within 90 days from the date of the notice and the Nominee company shall transfer assets to the appointed Nominee of the clients within five working days, failing which the commission shall appoint a Custodian.
“Comply with the commission’s Rules on withdrawal of registration before the decision to discontinue business shall be effective. A nominee company shall comply with the Commission’s Rules on internal controls; monitoring, review, evaluation and inspection of systems and controls; separate custody account; agreement with the client; preservation of records and disclaimer of liability” the rule states.
The rule outlines the functions of nominee companies to include maintaining accounts of securities of clients, collecting all rights and benefits on behalf of, or accruing to clients in respect of securities held, managing the holding of clients including facilitating sale, purchase, lending and borrowing securities and settlement of investment obligations based on the clients’ mandates as well as ensuring compliance with contractual obligations with clients and custodians.