What Is a Bearer Security and How Does It Work?

A bearer security is a financial instrument whose ownership is determined solely by physical possession. Whoever holds the physical certificate is considered the rightful owner. Bearer securities, such as bonds or shares, do not register the owner’s name with the issuing entity, allowing for anonymity in transactions. This contrasts with the common practice today where ownership records are centrally maintained.

Key Characteristics

There is no central registry or record of who owns a bearer security. Transfer of ownership occurs simply by physically delivering the certificate from one person to another, without formal documentation or registration.

Anonymity is a direct consequence of this lack of registration, as the issuer does not track the identity of the holder. This anonymity historically made bearer securities attractive for privacy in financial dealings. For instruments like bearer bonds, interest payments were collected by presenting detachable coupons to the issuer, and the principal was redeemed upon presenting the bond certificate at maturity.

Bearer Securities Versus Registered Securities

Bearer securities differ from registered securities in how ownership is recorded and transferred. Registered securities have the owner’s name and contact information recorded directly with the issuing entity or a transfer agent. This central record ensures that payments, such as dividends or interest, are sent directly to the named owner.

Transferring registered securities involves endorsing the certificate or formally notifying the issuer to update their records. This process provides a clear audit trail and enhances traceability, which is absent with bearer instruments. Notifications of corporate actions, like shareholder meetings or bond calls, are also sent directly to registered owners, a convenience not afforded to holders of bearer securities who must proactively seek such information.

The Decline of Bearer Securities

Bearer securities have significantly declined due to a global shift towards greater financial transparency. Concerns over their use in illicit activities, like money laundering and tax evasion, led to widespread regulatory changes. The anonymity inherent in bearer instruments made it difficult for authorities to trace the true beneficial owners, facilitating the concealment of illicit funds and avoiding tax obligations.

In the United States, the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982 prohibited the issuance of new bearer bonds, a measure aimed at combating tax evasion. Globally, organizations like the Financial Action Task Force (FATF) have identified bearer shares and bonds as high-risk instruments, advocating for their abolition or conversion into registered shares. Regulatory efforts, including beneficial ownership identification requirements, now mandate that financial institutions and certain companies collect and verify information about the individuals who ultimately own or control entities. These requirements, such as those under the Corporate Transparency Act, make bearer securities largely impractical and undesirable for legitimate financial activities today.