The last date for implementation of content requirements for Custody Agreements (under ASIC Regulatory Guide 133 and associated ASIC Class Orders) is 1 November 2015.
Responsible entities of registered managed investment schemes (REs), licensed providers of custodial or depository services (licensed custody providers) including those who provide custody services merely incidentally (eg trustees of unregistered schemes), managed discretionary account (MDA) operators and investor directed portfolio service (IDPS) operators should review their custody agreements with asset holders to ensure they meet the content requirements.
The 1 November 2015 implementation date applies to:
- REs that were first authorised as a responsible entity before 2 January 2014;
- licensed custody providers that were authorised to provide a custodial or depository service before 2 January 2014; and
- IDPS and MDA operators who first held assets of an IDPS or MDA service, or arranged for these assets to be held, before 2 January 2014.
All other REs, licensed custody providers and IDPS and MDA operators were required to ensure their custody agreements met the content requirements from 2 January 2014.
What are the content requirements?
REs, licensed custody providers and IDPS and MDA operators must ensure that there is a legally enforceable agreement with any asset holder they engage. The agreement must address a number of specified issues including:
- Rights to review and monitor the asset holder: The agreement must provide for reasonable rights for the ongoing review and monitoring of the asset holder and any sub-custodians, and address the criteria against which their performance will be assessed.
- Written certification: The agreement must require that the asset holder will certify in writing at least every 13 months that, subject to limited exceptions, it believes on reasonable grounds that it has met (and has no reason to believe it will not continue to meet) the minimum standards in the relevant class order and the terms of the agreement.
- Manner in which assets are held: The agreement must require that the asset holder will on request provide certain acknowledgements and notifications in relation to the manner in which it holds the assets.
- Giving of instructions: The agreement must address how instructions will be given to the asset holder.
- Liability: The agreement must contain reasonable liability provisions and where appropriate reasonable indemnity provisions in relation to losses caused by the acts and omissions of the asset holder.
- Security interests, mortgages, liens or other encumbrances: Subject to certain exceptions, the agreement must prohibit the asset holder from taking or granting to its associates any security interest, mortgage, lien or other encumbrance over the assets.
- Record keeping and reporting: The agreement must address how records in relation to the assets are held, the transactions and by whom, by what means and when they were authorised.
- Auditing: The agreement must require that the asset holder provides all reasonable access and assistance to any auditor engaged to audit the relevant financial statements.
- Identity of agents: The agreement must require that the asset holder provides prior written notice of the appointment of any agent it appoints to hold the assets.
- Termination: The agreement must address certain circumstances in which the agreement may be terminated where there are reasonable grounds to believe that the asset holder is not complying, or is unlikely to comply with, the agreement to a material extent.
- Breach reporting: The agreement must include appropriate provisions requiring that material or systemic breaches of the agreement will be notified in writing by the asset holder within a reasonable timeframe.
- Arrangements with other parties: The agreement must address the terms on which asset holders may engage another party as asset holder and require the appointment to be in the form of a written agreement which complies with the requirements in RG 133 and applicable ASIC Class Order (subject to certain exceptions).
- Business continuity: The agreement must require that the asset holder will establish and maintain business continuity arrangements that are reasonable for the nature, scale and complexity of the asset holder’s business.
- Confidentiality: The agreement must require that the asset holder must not disclose any confidential information relating to the custodial property, apart from disclosure to ASIC or as required or permitted by law or by the RE, licensed custody provider or operator in writing.
- Suspicious matter reporting for the responsible entity: Agreements to which a responsible entity is a party must also provide that the asset holder will establish and maintain adequate arrangements to ensure that the asset holder will report breaches by the responsible entity to ASIC within 10 business days if the asset holder suspects that the responsible entity has failed to report its own breaches as required under the Corporations Act 2001.
Parties engaged on or after 1 November 2015 as an asset holder by retail clients will also need to address a number of these issues in their agreements with retail clients.
Summary information only has been provided and must not be relied on without seeking advice in relation to the relevant circumstances.
Sophie is the director of both Sophie Grace Legal Pty Ltd and Sophie Grace Pty Ltd. Sophie has worked with some of Australia’s largest financial services organisations in compliance, legal and operational roles. She has also worked with small businesses to provide tailored solutions with a strong understanding of business practicalities as well as obligations to regulators.