Definition
Bearer Security refers to a type of financial instrument that does not require registration of ownership at issuance. Instead, ownership is determined solely by possession of the physical certificate. This means that there is no recorded owner in a ledger, and the holder of the certificate is presumed to be the owner with full rights to the instrument. Bearer securities can take forms such as bearer bonds or bearer shares.
Examples
- Bearer Bonds: A type of fixed-income security where the physical certificate is all that is required to redeem the bond. Interest payments are also collected by whoever holds the certificate.
- Bearer Shares: Equity instruments where the ownership is transferred simply by handing over the physical share certificates. These do not require any registration of the new owner’s details.
Frequently Asked Questions (FAQs)
Q: Why have bearer securities become rare?
A: Bearer securities have become rare due to increased regulations aimed at preventing their misuse for illegal activities such as money laundering, tax evasion, and financing of terrorism. The anonymous nature of bearer securities makes tracking ownership difficult for regulatory authorities.
Q: When did the UK ban the issuance of new bearer shares?
A: The United Kingdom made the issuance of new bearer shares illegal starting from May 2015. Existing holders were given a nine-month period to convert their bearer shares into registered shares.
Q: What are the risks associated with bearer securities?
A: Key risks include loss or theft (since possession equals ownership), difficulty in tracking and recovering lost securities, and potential for misuse in illegal activities due to anonymity.
Q: How do registered shares differ from bearer shares?
A: Registered shares have a recorded owner in a company’s shareholder register, reducing anonymity and increasing transparency in ownership, whereas bearer shares do not have any recorded ownership, which allows anonymous transfer.
Q: Can bearer securities still be issued in any jurisdiction?
A: While many jurisdictions have severely restricted or banned the issuance of bearer securities, there are still some regions where they are allowed, albeit with stringent regulatory measures in place to combat misuse.
- Bearer Bond: A fixed-income security where the holder of the physical certificate is deemed the owner and entitled to the bond’s interest payments.
- Registered Shares: Shares that are issued to a specific person whose name is recorded in the company’s shareholder register.
- Certificate of Deposit (CD): A bearer instrument issued by banks that can be traded in the secondary market.
- Book-entry Security: Securities where ownership is recorded electronically rather than through physical certificates, offering increased security and efficiency.
- Money Laundering: The process of concealing the origins of illegally obtained money, often by means of transfers involving bearer securities.
Online References
- Investopedia: Bearer Bond
- SEC.gov: Bearer Security
- HMRC: Bearer Securities
Suggested Books for Further Studies
- “Bonds: The Unbeaten Path to Secure Investment Growth” by Hildy Richelson and Stan Richelson
- “Investment Valuation: Tools and Techniques for Determining the Value of Any Asset” by Aswath Damodaran
- “Foundations of Financial Markets and Institutions” by Frank J. Fabozzi
Accounting Basics: “Bearer Security” Fundamentals Quiz
### What determines the ownership of a bearer security?
- [ ] Record in the company's register.
- [x] Possession of the physical certificate.
- [ ] Registration with a securities depository.
- [ ] An electronic registration system.
> **Explanation:** Ownership of a bearer security is determined solely by possession of the physical certificate. There are no registered records of ownership.
### Why have many jurisdictions restricted the use of bearer securities?
- [ ] To promote electronic transactions.
- [x] To prevent illegal activities like money laundering and tax evasion.
- [ ] To increase the value of securities.
- [ ] To simplify the financial markets.
> **Explanation:** Bearer securities are often restricted because the anonymity they provide can facilitate illegal activities like money laundering and tax evasion.
### What type of ownership recording system is used for bearer securities?
- [ ] Electronic registration.
- [x] Physical possession.
- [ ] Mixed framework.
- [ ] None of the above.
> **Explanation:** Bearer securities rely on physical possession for ownership, with no electronic or other form of ownership record.
### How were existing bearer shares managed in the UK after May 2015?
- [x] Owners had to convert them to registered shares.
- [ ] They were voided automatically.
- [ ] They continued as bearer shares with stricter regulations.
- [ ] Owners received penalties for holding them.
> **Explanation:** Existing bearer shares in the UK had to be converted to registered shares within a specified period to comply with new regulations.
### Which type of financial instrument allows anonymous transfer by simple physical transfer?
- [ ] Electronic Security.
- [ ] Registered Bond.
- [ ] Mutual Fund Certificate.
- [x] Bearer Share.
> **Explanation:** Bearer shares allow for anonymous transfer simply by physically transferring the certificate.
### What is one major benefit of registered shares over bearer shares?
- [ ] Greater liquidity.
- [ ] Higher dividends.
- [x] Increased transparency.
- [ ] No risk of theft.
> **Explanation:** Registered shares provide increased transparency by having ownership details recorded, unlike bearer shares.
### In what form are ownership records of book-entry securities maintained?
- [ ] Hand-written ledgers.
- [ ] Microfilm records.
- [x] Electronic registration.
- [ ] Physical certificates.
> **Explanation:** Book-entry securities maintain ownership records electronically, making tracking and transferring ownership more efficient.
### How does the risk of loss compare between bearer securities and registered securities?
- [x] Higher for bearer securities.
- [ ] Equal for both.
- [ ] Higher for registered securities.
- [ ] No risk involved in either.
> **Explanation:** The risk of loss is higher for bearer securities because possession equates to ownership, and losing the physical certificate means losing the security.
### What fundamental purpose do bearer bonds serve compared to other bonds?
- [x] Preserving anonymity.
- [ ] Maximizing returns.
- [ ] Reducing transaction costs.
- [ ] Enhancing transparency.
> **Explanation:** Bearer bonds serve to preserve anonymity, as they do not record the owner's identity.
### Why might financial institutions prefer book-entry securities over bearer securities?
- [ ] Lower transactional costs.
- [ ] Enhanced prestige.
- [ ] Fixed annual returns.
- [x] Greater security and efficiency.
> **Explanation:** Financial institutions may prefer book-entry securities for their greater security and efficiency offered by electronic record-keeping and transaction processes.
Thank you for deepening your understanding of bearer securities and taking the quiz to reinforce your knowledge. Keep striving for excellence in your financial literacy journey!
