What is a beneficial owner?

Definition and Examples of Beneficial Owners

Types of Beneficial Owners

Alternatives to Beneficial Ownership

Advantages and Disadvantages of Beneficial Ownership

Definition and Examples of Beneficial Owners

A beneficial owner is a person who enjoys the benefits of owning property or assets, even though they may not be the actual legal owner. Beneficial owners enjoy the benefits of ownership, such as voting rights and the ability to make investment decisions. Beneficial owners may also be the legal owners, but this is not always the case. Most investors hold shares in street name and are recorded as beneficial owners of the stock.

Types of Beneficial Owners

Beneficial owners also have relevant external stakeholders in investments. In addition to individual shareholders who are registered as beneficial owners of stock certificates, legal entities also have beneficial owners. Legal entities include corporations, limited liability companies, partnerships, or other entities formed by submitting a document to the state secretary. When these entities open accounts at financial institutions, the financial institution must identify the beneficial owners to comply with anti-money laundering rules.

Alternatives to Beneficial Ownership

Instead of holding shares in street name and registering them as beneficial owners on the brokerage’s books, you can also own shares in a physical stock certificate or participate in direct registration. Here’s how these alternatives work.

Physical Holding: By physically holding the stock certificate, the shares will be registered in your name and sent to you. You will be responsible for protecting them, and the relevant company will send all communications directly to you.

Direct Registration: In this case, the shares are registered in your name, but they are not actually sent to you. The company or transfer agent will hold them on your behalf.

Advantages and Disadvantages of Beneficial Ownership

There are advantages and disadvantages associated with being the beneficial owner of shares registered in street name at a brokerage.

Advantages:

• Efficient Trading: Shares held in street name can be traded more efficiently because the brokerage actually holds them. You do not need 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 specified price.
• Actual Safety: The broker who is considered the registered owner of the shares is responsible for ensuring the actual safety and security of the shares. If they are lost or stolen, you will not be held responsible.
• Notifications from the Brokerage: Through this method, you will receive ongoing updates about your assets. If there is an offer to buy your shares or if you hold a callable bond, your broker may inform you.

Disadvantages:

• Delay in Dividend or Interest Distribution: Your broker may transfer dividends and interest at regular intervals, such as weekly or monthly. This could cause a slight delay between the time the company sends them and the time you receive them.
• Delay in Communication: Since you are not the registered owner on the company’s books, you will not receive direct communications related to its progress.

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Sources:

• Cornell Law School Legal Information Institute. “17 CFR § 240.13d-3 – Determination of Beneficial Owner.” Accessed July 14, 2021.
• U.S. Securities and Exchange Commission. “What Is a ‘Registered’ Owner? What Is a ‘Beneficial’ Owner?” Accessed July 14, 2021.
• Cornell Law School Legal Information Institute. “31 CFR § 1010.230 – Beneficial Ownership Requirements for Legal Entity Customers.” Accessed July 14, 2021.

Source: https://www.thebalancemoney.com/what-is-a-beneficial-owner-5192615