GEN 2.13.1 Guidance

1. A Person does not become a Fund Manager of a Fund merely by being appointed by a Fund Manager of a Fund to provide the Financial Service of Providing Custody to the Fund. This is because the Fund Manager remains legally accountable to the Unitholders of the Fund for the safe custody and proper management of the Fund in accordance with its Constitution and Prospectus.

How does Providing Custody differ from Arranging Custody?

2. The Financial Service of Providing Custody differs from that of Arranging Custody because:
a. a PersonProviding Custody is legally accountable to Clients for 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; and
b. a Person arranging Custody does not become a party to the arrangement to Provide Custody and hence does not assume any duties or responsibilities to the Client for the safe custody of the Client's Investments — instead, such a Person merely 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 Service of Providing Custody.
4. A Person:
a. 'safeguards' a Client's Investments if that Person is the holder of the legal title to the Client's Investments (whether in certificated or uncertificated form); and
b. 'administers' a Client's Investments if that Person carries 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 Agent is simply an agent of the firm which Provides Custody. A Person is regarded as Providing Custody even 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 Client for the safe custody of the Investments of the Client.
6. The DFSA requires a firm which Provides Custody, if it is outsourcing or delegating the safeguarding or administering of Client Investments to 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 Custody is subject to the Client Investments provisions in COB section 6.13 and the Safe Custody Provisions in COB App6. The firm may hold and control Client Investments directly (i.e. itself) or indirectly (i.e. through a Third Party Agent).
8. Activities that constitute 'holding or controlling' Client Investments and 'safeguarding and administering' Client Investments can overlap. Guidance items 9 to 11 set out some examples to illustrate the interconnectivity and overlap of such activities.
9. In the case of Investments the title to which is evidenced by a physical instrument (e.g. a share or debenture certificate), a Person who has physical possession of the certificate 'holds' it. It is possible that the Person who has physical possession is also the legal owner (i.e. the Person in 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 Custody in 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 Custody continues to be subject to the Client Investments provisions in COB 6.13 and the Safe Custody Provisions in COB App6.
10. In the case of Investments which are held in uncertificated or dematerialised form, the Person in whose name the rights to the relevant Investments are 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 Investments will be issued to the Person in whose name the dematerialised Investments are registered. Again, a firm that Provides Custody may appoint a Third Party Agent to hold and have access to them, in which case, the firm Providing Custody indirectly holds and controls those Investments, and remains accountable to the Client for the safe custody of those Investments. The firm must also comply with the Client Investments provisions in COB 6.13 and the Safe Custody Provisions in COB App6.
11. A Person, who has the power and authority to give directions in relation to Investments, controls the relevant Investments. Generally, the Person who 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 Custody would carry out such tasks for the purposes of administering Client Investments, either directly (i.e. itself) or indirectly (i.e. through a Third Party Agent appointed by it).
[Added] DFSA RM72/2010 (Made 11th July 2010) [VER26/07-10]
[Amended] DFSA RM184/2016 (Made 7th December 2016). [VER38/02-17]