Bearer Instrument – a Type of Fixed-income Security

Bearer Instrument – a Type of Fixed-income Security

A bearer instrument is a type of fixed-income security in which no ownership information is recorded and the security is delivered to the purchaser in physical form. It is a document that entitles the holder to ownership or title to the underlying property, such as stocks or bonds. The holder of a bearer instrument is presumed to be the owner, and the holder of the physical bond is entitled to the coupon payments.

Unlike traditional registered instruments, no record of who owns bearer instruments or transactions involving ownership transfer is kept, allowing both the owner and the purchaser to deal with the property anonymously. Bearer form security issuers keep no record of who owns the security, so the security is traded without a record of ownership. Whoever physically holds the bearer document is presumed to be the owner of the property and any rights that may arise from it, such as dividends. Transferring ownership is as simple as transferring the certificate, and there is no need to report the transfer.

A bearer instrument is one that is payable to anyone who possesses it and is negotiable solely through transfer. Shares and bonds, for example, are bearer instruments. Bearer instruments differ from normally registered instruments in that no records are kept about the person who owns the instrument.

Bearer instruments are popular among investors and corporate officers who want to remain anonymous. In a 2003 report, the OECD concluded that using bearer shares is “perhaps the single most important (and perhaps the most widely used) mechanism” for protecting the anonymity of a ship’s beneficial owner. Possession of a bearer share confers ownership of the corporation, which in turn owns the asset. There is no requirement to report the transfer of bearer shares, and not all jurisdictions require that their serial numbers be recorded at all.

A bearer form security’s issuer keeps no record of who owns the security at any given time. However, establishing ownership (or legal entitlement) in the event of loss or theft is extremely difficult. This means that the security is traded without any record of ownership, and physical possession of the security is the only proof of ownership. In general, the legal situs of the property is the location of the instrument. Bearer instruments can be used to avoid transfer taxes in certain jurisdictions, though taxes may be charged when bearer instruments are issued.

In the United States, a negotiable instrument (such as a check or promissory note) payable to the order of “bearer” or “cash” may be enforced (i.e. redeemed for payment) by the party in possession under the Uniform Commercial Code. By endorsing (signing) the back, the payee (i.e. the person named in the “pay to” line) can also convert an instrument into a bearer instrument. However, in practice, many merchants and financial institutions will not accept a check presented for payment by anyone other than the named payee.