Your overseas shares sit in someone else's name

Explain custody and nominee accounts, and say who holds each of your overseas investments for you.

Most people who buy shares through an app never find out where those shares sit, whose name they are recorded under, or what legal arrangement stands behind them. On an ordinary day these details make little difference. If the firm in the middle collapses, they decide what you get back. Together they are called custody: the question of who holds an asset on your behalf, in whose name, and on what legal terms. Custody is the first idea of the course.

Shares bought in Singapore are the simpler case. Say you buy a Singapore bank share through a broker linked to your CDP account. The Central Depository (CDP) records that share in your own name. If the broker closes down, you still own the share, because CDP keeps its register apart from the broker's own books.

US shares usually take a longer route. Your broker typically does not hold a US company's share itself. A custodian, the firm that actually holds the securities, holds it for the broker. The custodian is often a large bank or a US broker, and it holds the share through the Depository Trust Company (DTC), the US central depository. Your name does not appear on the company's register at any point in that chain. Your ownership is an entry in your broker's books recording that some of the shares in a pooled account belong to you.

The pooled account is a nominee account, held in the custodian's or broker's name for the benefit of many clients. Most retail investors in Singapore hold their overseas shares through one. Nominee accounts are normal and they are not a scam. They keep cross-border trading cheap, since one broker can settle thousands of client trades through a single pooled account.

A nominee account does change what you need to find out. When your shares are in CDP, your main concern is whether the company itself is sound. With a nominee account you have a second concern as well: if the firm holding your shares fails, you need to know how you would prove which shares are yours and recover them.

The answer depends on the rules the firm operates under, and those depend on where it is licensed. A Singapore broker with a capital markets services licence from MAS has to keep customer money and assets apart from its own, in trust or custody accounts opened for clients. A US broker-dealer has to follow US customer protection rules and is usually a member of SIPC, a US body that steps in when a member firm fails and client assets are missing. Other countries run their own schemes. Lesson 1.3 goes through the Singapore, US and other investor protection schemes in turn.

Your protection comes from the legal entity your account is opened with. That entity is often a different company from the one whose logo you see in the app on your phone. Many international brokers place Singapore customers with a Singapore subsidiary, or with an entity in a third country, and this surprises a lot of investors. Two people trading on the same app can have accounts with different legal entities, each covered by different rules. Both the account agreement and the account statement name the entity, yet most investors read neither document.

Custody affects you well before any failure. Dividends paid into a nominee account go through the custodian first, and that is where withholding tax is deducted (module 3 deals with withholding tax). The broker handles corporate actions such as rights issues and share splits, sometimes for a fee and sometimes with fewer options than a registered holder would have. If you die, your family has to work with the broker and its custodian to get the shares out, which is much easier when they know the account exists.

None of this makes overseas investing too risky to try. It means you should know three facts about every brokerage account you hold: which legal entity the account is with, which regulator licenses that entity, and how client assets are held, either in your own name or in a nominee or custodian account. These three facts say more about how safe your shares are than any review or ranking, and gathering them takes about ten minutes. The account agreement or the account statement names the entity. Where you cannot find an answer, write down the question you would send to the broker's support team.

Your task: take the account agreement or the most recent statement for each brokerage account you have. For each account, write down the exact name of the legal entity, the country it is licensed in, and whether your shares are held in your own name or in a nominee or custodian account. If you cannot find an answer, write the question you would send to the broker's support team. Keep the list, because you will use it in lesson 1.4.

Take each brokerage account you hold and write down three things: the legal entity name, the country that licenses it, and whether your shares are in your own name or in a nominee account.

Course

• Investing in US and global markets from Singapore