October 2015
Does Your Custody Agreement Comply?
Practice Group(s):
Australia Investment Management Alert
Investment
Management
All custody agreements will need to comply with new content requirements from 1
November 2015 as set out by the Australian Securities & Investments Commission
(ASIC) in Regulatory Guide 133: Managed investments and custodial or depository
services: Holding assets (RG 133) and associated ASIC Class Orders.
Responsible entities of registered managed investment schemes, licensed custodians,
managed discretionary account (MDA) operators and investor directed portfolio service
(IDPS) operators should review their custody agreements with asset holders they engage
with to ensure they meet these new content requirements.
Who Does RG 133 Apply to?
In November 2013, ASIC updated its guidance in RG 133 relating to holding assets in
custody and issued Class Orders, to give effect to its new policies in RG 133. These new
policies and associated ASIC Class Orders apply to responsible entities of registered
managed investment schemes, licensed custody providers, MDA operators and IDPS
operators who are responsible for assets held as part of their services to clients. In
addition to setting out minimum standards for these asset holders which apply from 2
January 2015, the updated RG 133 and associated ASIC Class Orders also impose
certain requirements for the content of custody agreements.
When do the new Content Requirements Apply?
The last remaining implementation date to comply with the new content requirements for
custody agreements in the updated RG 133 and associated ASIC Class Orders is 1
November 2015. Specifically, this implementation date applies to:
•
responsible entities that were first authorised as a responsible entity before 2
January 2014
•
licensed custodians that were authorized to provide a custodial or depository
service before 2 January 2014
•
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 responsible entities, licensed custodians and IDPS and MDA operators were
required to ensure their custody agreements met the new content requirements from 2
January 2014.
What are the new Content Requirements?
The new content requirements in the updated RG 133 and associated ASIC Class
Orders are broader in scope and are more prescriptive than those in the previous version
of RG 133. Specifically, the updated RG 133 and associated ASIC Class Orders require
that, subject to limited exceptions, responsible entities, MDA operators and IDPS
operators must have an agreement with any master custodian, and must ensure that this
agreement and any agreement between any master custodian and any sub-custodian,
address the following issues:
•
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, as well as 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 the minimum standards which apply to it
and that it is complying with 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 and how and when transactions were authorised.
•
Auditing: The agreement must require that the asset holder provides all
reasonable assistance to any auditor engaged to audit the financial statements to
which the assets relate.
•
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 appropriate business continuity arrangements.
•
Confidentiality: The agreement must require that the asset holder will keep any
information of a confidential nature in confidence, other than as permitted under
the agreement or by law or where disclosed to ASIC.
•
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 it 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.
Responsible entities, licensed custodians and MDA and IDPS operators should
undertake a review of their agreements with asset holders to determine whether their
existing custody arrangements will need to be amended or updated before 1 November
2015 - to comply with the new content requirements in RG 133.
Authors:
Elizabeth Gray
liz.gray@klgates.com
+61.2.9513.2403
Matthew Watts
matthew.watts@klgates.com
+61.2.9513.2581
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