Changes affecting deposited securities: Overview, definition, and example
What are changes affecting deposited securities?
Changes affecting deposited securities refer to any modifications, alterations, or events that impact the ownership, terms, value, or conditions of securities that are held in a deposit account or with a custodian. These changes can include corporate actions such as mergers, acquisitions, stock splits, dividend payments, or changes in the terms of the securities themselves. These changes may affect the rights and obligations of the holders of deposited securities, and it is important for custodians or depositary institutions to communicate these changes to the securities’ owners to ensure that they are aware of their updated rights or holdings.
For example, if a company issues a stock split, the number of shares held by a depositor will increase, but the value per share may decrease.
Why are changes affecting deposited securities important?
Changes affecting deposited securities are important because they ensure that securities holders are properly informed and their holdings are accurately adjusted based on corporate actions or other relevant events. These changes can impact the financial position of the security holder, such as affecting dividends, voting rights, or capital gains. For custodians and depositary institutions, managing these changes effectively ensures that they remain compliant with regulations and maintain the trust of the security holders. Timely notification and proper administration of changes affecting deposited securities help prevent disputes and ensure smooth, transparent operations in securities management.
Understanding changes affecting deposited securities through an example
Let’s say an investor holds shares of a company in a brokerage account. The company announces a 2-for-1 stock split, which means the investor's shares will double in quantity, but the price per share will be halved. If these shares are held in a depositary account, the institution managing the account will need to update the investor’s holdings to reflect the new number of shares. The institution will notify the investor about this change and adjust the securities held accordingly.
In another example, a bondholder deposits their bonds with a custodian. If the company issuing the bonds calls the bonds early, the custodian will inform the bondholder and adjust the deposit to reflect the redemption of the bonds, ensuring that the bondholder’s account is accurately updated to reflect the change.
An example of a changes affecting deposited securities clause
Here’s how a clause regarding changes affecting deposited securities might appear in a custodial agreement or securities deposit contract:
“The Custodian agrees to notify the Depositor of any material changes affecting the deposited securities, including but not limited to corporate actions such as stock splits, mergers, dividends, or changes to the terms of the securities. The Custodian will adjust the Depositor’s holdings accordingly and provide detailed information regarding the impact of such changes.”
Conclusion
Changes affecting deposited securities are crucial to ensuring that security holders are informed of adjustments to their holdings due to corporate actions or other significant events. These changes may impact the value, quantity, or conditions of the securities, and custodians play a key role in ensuring that these adjustments are made accurately and communicated effectively. By managing these changes properly, both custodians and security holders can maintain clarity and avoid any disruptions in their holdings or rights.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.