30 May 2022

Custodians on the share register

SALONI SURI, Shareholder Analytics

In a previous blog, we talked about the structure of the share register. Common accounts on a share register include Retail Investors, Company Directors and Management, and Custodial or Nominee accounts. In this blog we will take a closer look at Custodians.

Custodians’ accounts can be the most prominent shareholders on a share registry. They play an important role in satisfying legal and commercial requirements for professional investors, such as superannuation funds or mutual funds.

A key role is to hold investments in trust, to enable investment decisions to be made by the investment managers appointed by the beneficial holder, without needing to transfer ownership of the assets to that investment manager. Custodians also manage the time-consuming administration tasks associated with share ownership, providing significant efficiency benefits.

Custodial accounts are often incorrectly believed to be purely a tool to allow certain shareholders to disguise or hide their shareholding. However, this conclusion misunderstands the transparency available to discover underlying beneficial holders. Where strategic holders seek to avoid transparency of ownership this is generally achieved through broker lending or derivative accounts, which are not subject to the same disclosure obligations as custodial accounts.

It is often the case that a custodian holds shares on behalf of several beneficial holders. In addition, appointed investment managers often control the investment decisions of assets held in more than one custodial account. This matrix of ownership and decision making can often make it difficult for a company to immediately identify the beneficial owners and decision makers of its shares from the share register alone.

Different custodians cater to different types of investors. Custodians like HSBC, Citicorp, JPMorgan, UBS Nominees and BNP Paribas are commonly found on share registers and are typically used by institutional investors. The holdings of these Custodians are often large and are known for having layers of custodial or nominee accounts beneath them. While the end beneficial owners behind these nominees are typically institutions, it is also common for there to be retail investors who hold via ‘wrap’ or ‘platform’ accounts. A wrap account is an administration structure which enables a retail investor to hold their investments, including those held in superannuation, in an efficient and cost-effective manner.

There are some custodians, such as Macquarie Bank owned Bond Street, which are mostly retail oriented. Another common example of a retail focused custodian is Netwealth, which offers superannuation and investment wrap accounts. Wrap accounts are designed to save retail investors time and money. Charges are usually a flat fee on a quarterly or annal basis and cover all administrative, research, advisory and management expenses, including providing most of the information for tax returns in a single consolidated report.

A few custodial accounts like Brispot, New economy, Warbont are also used for temporary lending/collateral purposes. By virtue of the legal structure of their shareholdings and customer contracts, these parties can often avoid  disclosure of the counterparties to their agreements.

At FIRST Advisers, we specialise in identifying beneficial owners and investment decision makers behind these different types of custodial and nominee accounts and provide a breakdown on which of those parties exercises the voting rights. Our expertise in identifying the investors greatly benefits our clients’ investor relations and shareholder targeting, by facilitating a better understanding of the register composition by type, location and investment style, and also how these factors change over time.

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