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.