Compensation of custodian: Overview, definition, and example
What is compensation of custodian?
Compensation of custodian refers to the fees, expenses, or other payments made to a custodian for providing safekeeping and administrative services for financial assets, documents, or property. Custodians, such as banks or trust companies, typically receive compensation based on a fixed fee, percentage of assets under custody, or transaction-based charges.
For example, an investment fund may pay a custodian a 0.10% annual fee based on the total assets held in custody for providing safekeeping and administrative services.
Why is compensation of custodian important?
Compensating a custodian is important because custodians play a critical role in securely managing and safeguarding financial assets, legal documents, and investments. Clear compensation terms in agreements prevent disputes, ensure compliance with regulatory requirements, and provide transparency in financial transactions.
For businesses and investors, defining custodian compensation ensures that fees are predictable and aligned with the level of services provided, avoiding unexpected costs.
Understanding compensation of custodian through an example
Imagine a mutual fund hires a bank as its custodian to hold securities, process transactions, and handle recordkeeping. The custodian agreement specifies that the fund will pay the bank $50,000 per year plus transaction fees for these services. This compensation of custodian clause ensures that the bank is fairly paid for its responsibilities.
In another scenario, a private trust appoints a financial institution as a custodian to safeguard assets on behalf of beneficiaries. The agreement states that the custodian will receive an annual fee of 0.15% of total assets under management. This arrangement ensures that the custodian is properly compensated for its role in managing and protecting the trust’s assets.
An example of a compensation of custodian clause
Here’s how a compensation of custodian clause might appear in an agreement:
“The Custodian shall be compensated for its services as follows: (i) an annual fee of [Amount] or [Percentage] of assets under custody, payable in quarterly installments; and (ii) reimbursement of all reasonable expenses incurred in the performance of its duties. Any changes to compensation shall require the prior written consent of both Parties.”
Conclusion
Compensation of custodian ensures that custodians are fairly paid for providing safekeeping, administrative, and financial management services. Clearly defining custodian fees in agreements prevents disputes, ensures transparency, and aligns payment terms with the level of service provided.By including a compensation of custodian clause in contracts, businesses, investors, and financial institutions can establish clear expectations on fees, payment structures, and expense reimbursements, ensuring a smooth and transparent financial relationship.
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.