Custody arrangements: Overview, definition, and example
What are custody arrangements?
Custody arrangements refer to the legal and operational setup that determines how assets, funds, or securities are held, managed, and protected by a third party, known as a custodian. These arrangements are commonly used in the context of investment management, estate planning, or securities transactions to ensure the safekeeping of assets and to facilitate the execution of transactions. Custodians can be banks, trust companies, or other financial institutions responsible for holding assets securely and handling related administrative duties such as record-keeping, income collection, and reporting.
For example, in investment management, a custody arrangement might involve a bank holding and managing mutual fund assets on behalf of the investment firm.
Why are custody arrangements important?
Custody arrangements are important because they protect assets from theft, loss, or mismanagement. By engaging a trusted third party, individuals or companies can ensure that their assets are secure, properly administered, and available when needed. These arrangements also help ensure compliance with regulatory requirements for financial transactions, particularly in the handling of investment portfolios or client funds.
For businesses, establishing clear custody arrangements helps mitigate risks related to asset security and offers reassurance to clients, investors, and regulators that their assets are being managed in accordance with applicable laws and industry standards.
Understanding custody arrangements through an example
An investment management firm hires a custodian to manage its clients’ assets. The custodian is responsible for safekeeping the clients' securities, processing transactions, and providing regular account statements. The custody arrangement ensures that the investment firm can focus on portfolio management, while the custodian handles the secure storage and oversight of the assets.
In another scenario, a family hires a trustee as part of their estate plan. The trustee is responsible for holding and managing the assets in the family trust, including investments and real estate, until the trust’s terms are fulfilled. The family establishes a custody arrangement with the trustee to ensure the proper administration of the estate.
An example of a custody arrangements clause
Here’s how this type of clause might appear in a contract:
“The Company agrees to engage [Custodian Name] as the custodian for all assets held under this Agreement. The Custodian shall be responsible for the safekeeping, settlement of transactions, and record-keeping of all assets, in accordance with industry standards and regulatory requirements. The Custodian shall provide quarterly reports to the Company regarding the status of all assets held under this Agreement.”
Conclusion
Custody arrangements provide a crucial mechanism for safeguarding assets, ensuring proper administration, and facilitating transactions in a secure and compliant manner. Whether in the context of investment management, estate planning, or securities transactions, clear and trusted custody arrangements are vital for protecting assets, maintaining transparency, and managing risks.
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.