As spelled out in the Securities Exchange Act, a beneficial owner regarding investment in securities is defined as a person who has or shares: Usually, investors do not take physical possession of the securities and instead have them registered in the name of the brokerage firm. While the investor is the beneficial owner of the shares, the brokerage firm remains the registered owner. This is also referred to as registering the shares in “street name” and is the most common way for retail investors to own shares.
Types of Beneficial Owners
Beneficial owners are relevant outside of investments, too. In addition to individual shareholders that are listed as the beneficial owners of stock certificates, legal entities also have beneficial owners. Legal entities include such organizations as corporations, limited liability companies, partnerships, or other entities that are formed by filing a document with a secretary of state. When these entities open accounts at financial institutions, the financial institution is required to identify the beneficial owners in order to comply with anti-money laundering rules. Under these regulations for financial institutions, a beneficial owner of a legal entity is defined as:
An individual who owns at least 25% of the legal entityAn individual with significant control, management, or direction ability over the legal entityA trust that owns 25% or more of the legal entity
Alternatives to Beneficial Ownership
Instead of holding the shares in street name and being listed as the beneficial owner on the brokerage firm’s books, you could also take physical ownership of a stock certificate or take part in a direct registration. Here’s how those alternatives work.
Physical possession: By taking physical possession of the stock certificate, the shares will be registered in your name and sent to you. You will be responsible for safeguarding them, and the respective company will send all communication directly to you.Direct registration: In this case, the shares are registered in your name, but they are not physically sent to you. The company or its transfer agent will hold them for you.
Pros and Cons of Beneficial Ownership
There are both pros and cons associated with being the beneficial owner of shares that are registered in street name at a brokerage firm.
Pros Explained
Efficient trading: Shares held in street name can be transacted more efficiently because the brokerage firm already holds them. You don’t have to take them to the broker to sell them. This allows you to place automatic order instructions, such as limit orders, to sell at a specific price. Physical safety: The broker who is the registered owner of the shares is responsible for ensuring the physical safety and security of the shares. If they are lost or stolen, you won’t be on the hook for them. Your brokerage firm will send notifications: With this method, you will be updated consistently on your assets. If there is a tender offer for your shares or you hold a bond that has been called, your brokerage firm may notify you.
Cons Explained
Delay in dividends or interest: Your brokerage firm may only credit dividend and interest payments at regular intervals, such as on a weekly, biweekly, or monthly basis. This could cause a slight delay between when the company sends them and when you receive them.Communication delay: Since you are not the registered owner on the company’s books, you will not directly receive communication materials regarding its progress.
