Standard of care as foreign custody manager of a portfolio: Overview, definition, and example
What is the standard of care as foreign custody manager of a portfolio?
The standard of care as a foreign custody manager of a portfolio refers to the level of diligence, attention, and responsibility that a custodian must exercise when managing and safeguarding the assets of a portfolio held in a foreign jurisdiction. A foreign custody manager is typically responsible for holding and safeguarding assets (such as securities or other financial instruments) in a jurisdiction outside of the portfolio's home country. The standard of care outlines the expected practices, procedures, and legal obligations that the custodian must follow to ensure the assets are properly protected, managed, and in compliance with relevant laws and regulations.
This standard of care is often defined by both local laws and international regulatory standards, such as those set by financial regulatory bodies or industry best practices. It requires the foreign custody manager to act in the best interest of the portfolio’s beneficiaries or owners, taking reasonable steps to prevent loss, theft, or mismanagement of the assets under their control.
Why is the standard of care important?
The standard of care is important because it ensures that the foreign custody manager acts responsibly and transparently when managing assets, particularly when those assets are outside the jurisdiction of the portfolio owner. This standard helps mitigate risks associated with foreign investments, such as legal complexities, currency fluctuations, and local regulatory differences. By maintaining a high standard of care, the custodian protects the portfolio’s assets, minimizes potential legal or financial liabilities, and upholds the trust and confidence of the portfolio’s investors or beneficiaries.
This standard is especially critical for institutional investors, hedge funds, mutual funds, or pension funds, where the safekeeping of large volumes of assets in foreign markets requires expertise and stringent oversight.
Understanding the standard of care as a foreign custody manager through an example
Imagine a large pension fund based in the United States invests in stocks listed in Europe. To handle these assets, the pension fund appoints a foreign custody manager to hold and manage the European stocks in a custodial account in the EU. The standard of care required of the foreign custody manager includes ensuring that the stocks are properly registered, monitoring the security of the account, complying with local regulatory requirements, and reporting on the status of the investments regularly. The custodian is expected to act prudently and manage the assets with the same level of care as it would for domestic assets, ensuring that the pension fund’s investments are not at risk of loss or mismanagement due to negligence.
In another example, an international bank acts as the foreign custodian for a global investment fund that holds assets in emerging markets. The bank’s standard of care includes conducting due diligence on the legal framework of each market, verifying the ownership of assets, securing the assets from potential theft, and ensuring compliance with both international regulations and the regulations of the host country. The custodian also must respond promptly to any market developments that could impact the value of the portfolio.
Example of standard of care clause for a foreign custody manager
Here’s an example of how a standard of care clause might appear in an agreement with a foreign custody manager:
“The Custodian agrees to exercise the highest standard of care in managing and safeguarding the Portfolio’s assets held in foreign jurisdictions. The Custodian will ensure that all assets are held in accordance with applicable local laws, regulations, and industry best practices. The Custodian will take all reasonable steps to prevent the loss, theft, or mismanagement of the assets, including securing proper registration and maintaining the necessary protections to comply with both local and international regulatory standards. The Custodian will promptly inform the Portfolio Manager of any material developments affecting the assets under custody.”
Conclusion
The standard of care as a foreign custody manager is a critical responsibility that ensures the proper management, protection, and compliance of a portfolio’s assets in foreign markets. By maintaining this standard, custodians reduce risks associated with managing international assets, protect the interests of the portfolio’s beneficiaries, and comply with local and global regulatory frameworks. It is a cornerstone of trust in financial transactions involving foreign investments and plays a vital role in ensuring the integrity and security of assets held in foreign jurisdictions. Understanding this standard is essential for both custodians and portfolio owners to safeguard investments and maintain financial confidence.
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.