GEN 2.13.1 GEN 2.13.1(1) In GEN Rule 2.2.2
Providing Custodymeans one or more of the following activities:(a) safeguarding and administering Investmentsbelonging to another Person;(b) in the case of a Fund, safeguarding and administering Fund Property; or(c) acting as a Central Securities Depository.(2) In (1)(a) and (b), the following activities do not constitute administering Investmentsor Fund Property:(a) providing information as to the number and value of any Investmentsor Fund Propertysafeguarded;(b) converting currency; or(c) receiving documents relating to an Investmentor Fund Propertyfor the purpose of onward transmission to, from or at the direction of the Personto whom the Investmentor Fund Propertybelongs.(3) In (1)(c), "acting as a Central Securities Depository" means holding securities in uncertificated (dematerialised) form to enable book entry transfer of such securities for the purposes of clearing or settlement of transactions executed on a facility operated by an Authorised Market Institutionor an Alternative Trading Systemor a similar facility regulated and supervised by a Financial Services Regulator.
GEN 2.13.1 Guidance1. A
Persondoes not become a Fund Managerof a Fundmerely by being appointed by a Fund Managerof a Fundto provide the Financial Serviceof Providing Custodyto the Fund. This is because the Fund Managerremains legally accountable to the Unitholdersof the Fundfor the safe custody and proper management of the Fundin accordance with its Constitutionand Prospectus.
How does Providing Custody differ from Arranging Custody?2. The
Financial Serviceof Providing Custodydiffers from that of Arranging Custodybecause:a. a Person Providing Custodyis legally accountable to Clientsfor safeguarding and administering Client Investments(which are defined as Client Assets— see the GLO definition), even if it appoints a Third Party Agent(see GLO) to hold Client Investments; andb. a Personarranging Custodydoes not become a party to the arrangement to Provide Custodyand hence does not assume any duties or responsibilities to the Clientfor the safe custody of the Client's Investments— instead, such a Personmerely facilitates a custodian to provide its services to a potential user of its services.
What is 'Safeguarding' and 'Administering' Investments?3. As set out in GEN Rule 2.13.1, both the elements (i.e. the activities) of safeguarding and administering, must be present before a Person is said to carry on the
Financial Serviceof Providing Custody.4. A Person:a. 'safeguards' a Client's Investmentsif that Personis the holder of the legal title to the Client's Investments(whether in certificated or uncertificated form); andb. 'administers' a Client's Investmentsif that Personcarries out activities as the holder of legal title to the Investments, such as effecting transactions, reinvesting dividends or other income arising from the Investments, and carrying out corporate actions relating to the exercise of rights attaching to the Investments(e.g. voting or appointing proxies to vote and accepting a rights offer/issue of Investments).
Who is a Third Party Agent?5. A
Third Party Agentis simply an agent of the firm which Provides Custody. A Personis regarded as Providing Custodyeven if it appoints a Third Party Agent(see GLO) to carry out either or both of the activities of safeguarding and administering its Clients' Investments. The Person Providing Custody(and not the Third Party Agent) remains accountable to the Clientfor the safe custody of the Investmentsof the Client.6. The DFSA requires a firm which Provides Custody, if it is outsourcing or delegating the safeguarding or administering of Client Investmentsto a Third Party Agent, to undertake due diligence relating to the Third Party Agent(see COB Rule A6.5.1).
What is the relationship between 'Providing Custody' and 'holding or controlling' Client Assets?7. A firm
Providing Custody, in order to safeguard and administer Client Investments, must hold and control those Investments. Therefore, a firm Providing Custodyis subject to the Client Investmentsprovisions in COB section 6.13 and the Safe Custody Provisions in COB App6. The firm may hold and control Client Investmentsdirectly (i.e. itself) or indirectly (i.e. through a Third Party Agent).8. Activities that constitute 'holding or controlling' Client Investmentsand 'safeguarding and administering' Client Investmentscan overlap. Guidance items 9 to 11 set out some examples to illustrate the interconnectivity and overlap of such activities.9. In the case of Investmentsthe title to which is evidenced by a physical instrument (e.g. a share or debenture certificate), a Personwho has physical possession of the certificate 'holds' it. It is possible that the Personwho has physical possession is also the legal owner (i.e. the Personin whose name the title to the certificate is registered). If this is not the case, the Person who 'holds' the certificate is generally regarded as an agent of the legal owner whose name appears on the share or debenture certificate. An example would be a firm Providing Custodyin whose name the certificates are registered, but the actual possession of the certificates is with a Third Party Agent(custodian) appointed by the firm. In this example, the firm Providing Custodycontinues to be subject to the Client Investmentsprovisions in COB 6.13 and the Safe Custody Provisionsin COB App6.10. In the case of Investmentswhich are held in uncertificated or dematerialised form, the Personin whose name the rights to the relevant Investmentsare registered (by the central securities depository) is the holder and controller of the relevant Investments. Generally, the 'PIN' or other unique identifier of the owner of the Investmentswill be issued to the Personin whose name the dematerialised Investmentsare registered. Again, a firm that Provides Custodymay appoint a Third Party Agentto hold and have access to them, in which case, the firm Providing Custodyindirectly holds and controls those Investments, and remains accountable to the Clientfor the safe custody of those Investments. The firm must also comply with the Client Investmentsprovisions in COB 6.13 and the Safe Custody Provisionsin COB App6.11. A Person, who has the power and authority to give directions in relation to Investments, controls the relevant Investments. Generally, the Personwho is the legal owner would have the power to give such directions. Examples are directions to effect transactions, to reinvest dividends or other income arising from the Investments, and to carry out corporate actions relating to the exercise of rights attaching to the Investments (e.g. to vote or appoint proxies to vote and to accept or renounce a rights offer/issue of Investments). A firm Providing Custodywould carry out such tasks for the purposes of administering Client Investments, either directly (i.e. itself) or indirectly (i.e. through a Third Party Agentappointed by it).