SHOULD SOLICITORS USE STOCKBROKERS' NOMINEES?As one of its initiatives, the Law Society's Financial and Investment Services working party has given detailed consideration to the use of stockbrokers' nominee companies by solicitors.

This article sets out some of the results of that work and provides guidance to solicitors.Pressure on solicitors to transfer securities held by them on behalf of clients and trusts to banks' or brokers' nominee companies is intensifying.

Normal settlement periods have been reduced to five days, and are likely to be farther reduced.

This may create difficulties for solicitors needing to obtain authority, share certificates and payment in order to complete a transaction.Brokers maintain that to facilitate trading in future it is better for securities to be held by them in a paperless form and they have drawn attention to the termination of the fast track service provided until now by registrars for the dematerialisation of securities into CREST holdings.

Some also claim, wrongly, that the new solicitors' investment business (custody) amendment rules 1998, which came into force on 31 March 1998, will be difficult to comply with by those solicitors who offer custodial services themselves [see 'Custody of investments -- new rules' [1998] Gazette, 28 January, 36; 'Custody Rules -- a practical guide', 11 February, 30; and 'Custody of documents -- common questions', 25 March, 31].It should be remembered that use of the CREST system is voluntary and dematerialisation may not be worth considering for the majority of small investors and trusts with few transactions.

Solicitors should make their own informed decision as to the advice to be given to clients about the use of CREST and brokers' nominee companies.

In a broker's nominee company the shareholder remains the beneficial owner of the shares but will probably lose voting rights, shareholders' concessions and communications from the company.

If a client should wish to retain share certificates, it may be possible for solicitors to reach an agreement with their brokers for settlements beyond the normal five days and to deal up to Transaction +25 days to allow sufficient time for delivery and to avoid penalties for late delivery.However, CRESTCo, which operates the system, may impose additional charges for settlements beyond the Transaction +5 days.

Those charges could be significant and will either have to be borne by the broker or passed on to the client.

In effect they will be an additional cost for paper settlement and solicitors should make clients aware of any penalty arising.Some firms of solicitors have established their own nominee companies providing ease of transactions without losing the valuable contact with their clients.

For, once the custody function has been passed to a stockbroker's nominee, the future role of the solicitor in the client's personal affairs may be substantially diminished.

An article has appeared in the Gazette on the topic of solicitors setting up and running their own nominee companies (see 'The full service', [1998] Gazette, 13 May, 26).

For those solicitors who do decide to recommend to clients and trusts that they should transfer assets to a broker's nominee company, there are a number of factors which they may need to consider.The primary concern must be to ensure that clients, whether individuals or trusts, are fully aware of the implications of the use of a nominee company to hold their securities and give consent to the transfer of their assets.

Where the firm appoints a third party custodian, for example, a stockbroker or the stockbroker's nominee, the firm must exercise due skill, care and diligence in their selection and appointment and must comply with the relevant new custody rules.

There may be occasions when a client chooses to appoint a broker without consulting the solicitor.

In that case, the firm must agree with the broker in writing any consequential arrangements, for example, for settlement.Solicitors need to be able to satisfy themselves that a broker's nominee is secure, that liability will lie with the broker in the event of default or fraud and will not revert to the solicitor.

To that end, it would be appropriate for solicitors to check the adequacy of a broker's indemnity insurance arrangements.

Unlike solicitors there is no absolute requirement for brokers to carry indemnity insurance and the level of cover of individual brokers varies.

Some of the larger brokers carry up to £20 million for each claim in addition to the Investors' Compensation Scheme and in recent years brokers have become more willing to provide information about their indemnity cover.Client literature will often provide details of the amount of cover carried and compensation arrangements.

Remember that brokers are regulated by the Securities and Futures Authority at present and will be regulated by the Financial Services Authority in the future.

Their regulatory regimes should provide considerable comfort for solicitors and their clients.The Law Society has reviewed the standard Securities and Futures Industry indemnity policy which is provided by CE Heath insurance brokers.

A legal opinion has been obtained on the policy which indicates that remaining concerns over some of the finer grounds for excluding claims are not so significant as to undermine fundamentally the protection of solicitors and their clients.

It should, therefore, be relatively straightforward for a solicitor on first contact with a broker to enquire as to whether they have appropriate insurance cover, their insurers, the amount of cover and any limitations or exclusions as to liability.

The Law Society understands that the CE Heath policy is used by two thirds of brokers and has been liaising with the Association of Private Client Investment Managers and Stockbrokers (APCIMS) with a view to persuading its members to be more forthcoming when faced by such requests from solicitors.

One result of that contact is the inclusion at clause 17 in the model agreement (see below) of an undertaking by the broker to provide details of its indemnity insurance policy on request.

The Law Society considers this to be a significant advance as only a few years ago some brokers were refusing to di vulge their indemnity cover.Solicitors are urged to review the terms of the broker's agreement and any supporting literature.

This should help to establish the respective duties of the broker and the client and the responsibility of a broker for any default of its nominee company.

Annexed are the terms of a broker's nominee and safe custody service agreement which the Law Society has discussed with a leading firm of private client brokers and with APCIMS with a view to providing a model form of agreement.

In the light of Law Society comments, the form of the agreement has been revised substantially and is now in a form which the Society considers to be both comprehensible in language and as offering reasonable protection for clients and their solicitors.The Law Society wishes to draw solicitors' attention to some of the provisions in the agreement.

The agreement provides for the payment of income from the client's assets to be paid to the client only quarterly unless other dates have been agreed with the broker.

The solicitor may wish to discuss the best options for the client and to agree, if appropriate, monthly or fortnightly instead of quarterly payments.

It is a question of balancing the possible cost against the benefit to the client.

Solicitors may also wish to establish the position with regard to the payment of interest on dividend income received between payments to clients.

Brokers are required to pay interest on monies held unless there is an agreement between the broker and the client not to pay interest.

This may be covered by a provision in the broker's agreement as is suggested in the model.

Similarly the solicitor/client may wish to come to a specific agreement as to the timing of the production of the consolidated tax certificate by the brokers.It would be helpful for solicitors to familiarise themselves with the provisions of the model agreement.

General points of which solicitors should be aware are that the agreement:-- specifies that the broker's nominee company is operated solely for the holding of clients' securities;-- guarantees that clients' assets are held separately from those of the brokers;-- indicates whether the client's securities are pooled with those of other clients in an undesignated nominee or are differentiated from other clients in a designated nominee.

In the case of undesignated nominees solicitors should explain to clients that their investments will be registered in the same name as those of other clients, that they may be used with those of other clients to settle transactions, and that one client's investments may not be identifiable immediately which could cause delays in recovering assets in the event of insolvency;-- ensures that regular statements of a client's holdings will be provided but requires that these should be checked by the client.

Brokers should identify any changes from previous statements as a matter of routine;-- specifies the basis upon which instructions to the broker for dealings in the securities can be made;-- indicates that, although the client remains the beneficial owner of the securities, some shareholder benefits may be unavailable to the investor;-- draws attention to the fact that clients have recourse to the Investors Compensation Scheme.The form of the agreement is intended only as a model.

It is likely that individual brokers will wish to incorporate their own particular provisions in their agreement.

It would, therefore, be worthwhile for solicitors to identify those variations and to give additional consideration to them.

The Law S ociety would certainly advise solicitors that they should not be party to an agreement which will provide the client with a standard of protection and indemnity cover inferior to that given in the model agreement.The Law Society is grateful to APCIMS for its assistance in the drafting of the model form of agreement and for presenting it to its constituent members with a recommendation for its adoption or the incorporation of similar provisions in existing agreements across the industry.The Law Society now has good contacts with APCIMS enabling future developments affecting investments to be discussed for the benefit of mutual clients and to keep the use of nominee companies under review.This article was written by the Law Society's Financial and Investment Services working party.MODEL NOMINEE AND SAFE CUSTODY AGREEMENTSAFE CUSTODY SERVICE1.

All securities accepted by us [insert name of firm] for this service are registered in the name of an eligible nominee company as defined by Securities and Futures Authority (SFA) rules or that of our overseas agents or their nominees ([SFA] approved banks, depositories or eligible custodians) hereinafter referred to as the firm's eligible custodian.DIFFERENT METHODS OF HOLDING INVESTMENTS2(i) UK registered securities may be held in dematerialised form in the CREST system and the firm's eligible custodian is bound to comply with the rules of that system.(ii) UK government securities may be held in the Central Gilts Office and the firm's eligible custodian is bound to comply with the requirements of that system.(iii) Non-UK securities may be held in an approved clearing house.

The settlement, legal and regulatory requirements which apply to those securities and the clearing house may be different from those which apply in the UK.(iv) All certificates, bearer instruments and other documents of title will be held by us or our overseas agents or by a bank in the UK, in segregated accounts maintained solely for clients' securities.LIEN3.

All securities held in this safe custody service will remain free of any lien, claim, right of retention, or any right of sale, against any liability on our account.

We shall however, have the right to withhold delivery from this service or realize any security in the event that you fail to pay any amount due to us in settlement of any transaction including commission or any other fees or charges due to us.

[It should be noted that this clause would not apply in Scotland and therefore an alternative clause may be required if one of the parties to the agreement is based in Scotland.].[DESIGNATED INVESTMENTS] [UNDESIGNATED INVESTMENTS]4.

Our Nominee and Safe Custody System is [undesignated] [designated] and the record of your securities is held by us electronically.

[Undesignated investments are pooled and, accordingly your securities may not be identifiable by separate certificates, other physical documents of title or equivalent electronic record of securities held by eligible custodians.] [Investments registered in the name of the firm's eligible custodian with a designation individual to you will be identifiable as separate from the investment of other clients.].ACCEPTANCE OF RESPONSIBILITY5.

We accept responsibility for all securities registered in the name of the firm's eligible custodian an eligible nominee company as defined by SFA rules, but not in the event of a default for those held by eligible custodians, save where any loss arises from fraud, willful default or negligence on our part.

Accordingly in the eve nt of an unreconcilable shortfall this would be shared by you on a pro rata basis.DIVIDENDS AND PAYMENTS 6.

We shall be responsible for claiming and receiving dividends, interest payments and, subject to clause nine below, other rights accruing to you.

[It may be necessary to provide for a situation where a company does not allow a partial election for a corporate action in respect of undesignated nominees.].REINVESTMENT 7.

Unless you have elected to reinvest your income it will be disbursed electronically at regular quarterly intervals, or on such dates as are mutually agreed, to the bank account nominated by you at the end of this agreement.

[No interest will, however, be paid on income accruing during the periods between such payments.] [Interest will be paid on income accruing during the periods between such payments.] Each income payment will be accompanied by a statement of account.Consolidated tax certificates will normally be issued annually as soon as practical following the tax year end.

Any income due to you on securities held abroad or from an overseas entity, is not payable by us [into customer/dividend collection or other specified account] until received and converted into your reference currency.ISSUE OF STATEMENTS 8.

Regular statements showing the securities held for your account will be forwarded to you in accordance with the rules of the SFA.

You are requested to check this statement and [to notify us of any errors that it may contain] [discuss any discrepancies between the statement and your own records with the firm].SCOPE OF FACILITIES9.

We [do not] [do] normally provide facilities in any of the following matters.

Accordingly users of this service may lose some of these benefits:[(i) scrip in lieu of dividends;].[(ii) shareholders report and accounts and other material issued by the entities for which we are providing nominee facilities;].[(iii) voting rights;+].[(iv) shareholders concessions;*].[Notes to 9 above.+ we may exceptionally and at our discretion contact you in relation to voting rights.* shareholders concessions are not normally extended to nominee companies.

Shareholdings must remain in your own name if you wish to continue receiving such concessions].10(a) Please note, discretionary clients excepted, that as regards investments, which we are holding on your behalf, we [shall not] [shall] be responsible for:[(i) taking up any rights;].[(ii) exercising any conversion or subscription rights;].[(iii) dealing with takeovers or other offers or capital re-organisations;].[unless you respond to our advice on these matters within the time stated.][(b) We reserve the right to use our discretion in this respect when it appears advantageous to you.

Such decisions will be taken in our absolute discretion based on the circumstances prevailing at the time they are made and we cannot be held responsible for subsequent events.

They will normally be made [three to five business days] prior to the action date and will vary according to the location of the relevant agent with whom documentation is to be lodged.].TRANSFERS11.

This agreement provides authority for us to transfer securities from your account to meet sales effected for your account, acceptance of offers or other matters covered by this agreement.

We will normally accept telephonic or facsimile instructions to transfer securities held by us into your own name, but require written instructions for any other arrangements.

In the case of trusts, we can only accept the ins tructions from all of the trustees and cannot take instructions from beneficiaries, settlors, etc.TAXATION 12.

You confirm that your residence for tax purposes is as set out in the address overleaf and recorded on our books.

If this is incorrect, please notify us, providing all necessary information.

If you are non-resident and wish to receive income free of UK tax on qualifying investments you should ask your normal contact at [insert name of firm] to supply the appropriate Inland Revenue form for completion and return to us.

We cannot be held responsible for any UK tax deducted unless these formalities are completed.

No tax relief can be given until the appropriate Inland Revenue forms have been completed.CLIENT INSTRUCTIONS 13.

[Your obligations and liabilities set out in this agreement shall, in the case of two or more persons as client, be joint and several obligations of each person.

We shall be entitled to act in accordance with the instructions of any one such persons without incurring any liability to any other such person and any one of such persons shall be able to give an effectual receipt for any security or money.].[For trustees -- we shall be entitled to act only in accordance with the instructions of all the trustees.].APPLICATION OF RULES 14.

Nothing in this agreement shall prevent us from carrying out our duties in compliance with all applicable rules of the SFA and of the London Stock Exchange [or Tradepoint] [or other Recognised Investment Exchange] and all other relevant laws, rules, regulations codes and practices from time to time applicable to our obligations hereunder and to which this agreement is hereby declared subject.

Nor shall we be in breach of any of the provisions of this agreement where such provisions are or appear to be inconsistent with our compliance with such laws, rules, regulations, codes and practices.DISCLOSURE OF INFORMATION 15.

[Insert name of firm] is authorised to disclose information relating to the client and/or the clients' investments to the SFA, [or the Panel of Takeovers and Mergers] and as otherwise required by law.SEVERANCE16.

Should any part of this agreement be held by any court of competent jurisdiction to be unenforceable or illegal or contravene any rule, regulation or by-law of any exchange or self-regulating organisation, the same shall be deemed to have been excluded from this agreement from the beginning, and this agreement shall be interpreted and enforced as though the provision had never been included.INSURANCE 17.

[Insert name of firm] and the firm's eligible custodian are covered against fraud and negligence by a professional indemnity insurance policy.

Details of the policy are available upon request.INDEMNITY 18.

You will indemnify us and our agents from and against any and all claims, proceedings, damages, loss and liability made or taken against or suffered or incurred by us in our capacity as nominees or custodian hereunder (including, without limitation, any liability to taxation anywhere in the world) except in so far as the same arises as a result of our negligence or willful default.CHARGES 19.

Our charges for this service will be in accordance with the published rates which are in effect at the time the charges are incurred.

[A copy of our charges is attached to this agreement.].TERMINATION 20(a) Our appointment hereunder will terminate in the following circumstances:(i) the termination of the agreement between us constituted by the client agreement letter;(ii) upon the expiry of at least one mont h's written notice from us to you;(iii) upon the expiry of at least one month's written notice from you to us;(iv) immediately in writing in exceptional circumstances (for example, in the event of your bankruptcy);(v) immediately in the event of the loss of authorisation by the firm's eligible custodian; or(vi) immediately in the event of [insert the name of the eligible custodian] being placed in liquidation or receivership.Any notice given pursuant to this paragraph shall be sent by post addressed to the address given [below] or [such other address as has been notified in writing for that purpose.].(b) Following termination, within a reasonable period, we shall deliver to you all records, registered documents of title, deeds and assets in respect of the securities belonging to you which are in our possession or control.INDULGENCES 21.

Our failure to seek redress for violations or to insist upon strict performance of any condition or provision of this agreement or our failure to exercise any right or remedy to which we are entitled hereunder, shall not constitute a waiver thereof.JURISDICTION 22.

The terms of this agreement shall be governed by and construed in accordance with English law and subject to the non-exclusive jurisdiction of the English courts.[INVESTORS COMPENSATION SCHEME 23.

As a private client of a firm regulated by the SFA you would receive the protection offered by the Securities Investment Board's compensation scheme in the event of [insert name of firm] failing.

This cover extends to clients using our nominee service who have signed the necessary client agreement letter.]Name of account: ..............................(with [insert name of firm])Existing account number(s): ...................Address: ...................................................................................................................................................................................Postcode: .....................................Income is remitted directly to your nominated bank account detailed below (please complete)Name of bank/building society: ................Branch/address: ...............................Bank/building society account name: ...........Account number: .............

Sort code: ......I/We agree to the terms and conditions of this agreement which augments and therefore becomes part of the terms of business or client agreement letter that I/we have received or entered into with you, or which is received or entered into with you, or which is received or entered into contemporaneously with or after this agreement.For corporate bodies: I/We are fully authorised to sign on behalf of the account.Signature ....................

Date: .........................................Date: ..........[Note: for trusts -- all trustees must sign this form]Please retain a copy of this agreement and return one copy to us in order for this arrangement to become effective.[Insert name of firm][Member of [London Stock Exchange/Tradepoint/other Recognised Investment Exchange]]Regulated by the Securities and Futures Authority=WordStar 4.0B Messages 14 Feb 87Copyright (C) 1983,1987 MicroPro International Corp.All