Custody Agreement – Regulatory Guide 133

Current Status

All custody agreements are required to comply with new content requirements from 1 November 2015 as set out in Regulatory Guide 133 ‘Managed investments and custodial or depository services: Holding assets’ and associated ASIC Class Orders dated November 2013 (RG 133).

RG 133 updates existing measures to:

• apply minimum standards to asset holders for managed investment schemes and holders of financial products, and directly affects responsible entities, custodians, platform operators and managed discretionary account operators;
• ensure agreements with asset holders have certain minimum terms; and
• require primary production scheme responsible entities to safeguard the land on which the scheme operates.

The new measures have been staggered with the revised requirements applying from 2 January 2014 to asset holders that first hold assets or arrange for them to be held after that date. Otherwise asset holders had until 2 January 2015 to comply with the new requirements and until 1 November 2015 to ensure custody agreements with asset holders comply with the changes.

Given the above timing Responsible Entities of registered managed investment schemes, licensed custodians, managed discretionary account (MDA) operators and investor directed portfolio service (IDPS) operators have been reviewing the impact on their custody agreements with asset holders they currently engage with to ensure they meet these new content requirements.

RG 133 will apply to the following entities/structures

RG 133 is for:

• responsible entities of registered managed investment schemes;
• licensed providers of custodial or depository services (licensed custody providers);
• operators of managed discretionary account (MDA) services that are responsible to clients for assets held under an MDA service; and
• investor directed portfolio service (IDPS) operators that are responsible to clients for assets held under an IDPS.

When do the Content Requirements Apply?

The last remaining implementation date to comply with the new content requirements for custody agreements in RG 133 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 authorised 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; and
• 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 RG 133 Content Requirements?

The updated RG 133 and associated ASIC Class Orders require that 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:

• 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 Responsible Entities: Agreements to which a responsible entity is a party must 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.
• 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.

One Investment Group provides custodial services with an experienced and dedicated team. One Investment Group is RG133 compliant and is able to provide a wide range of services to assist in the management and safeguarding of asset portfolios. If you are seeking to appoint a custodian, please do not hesitate to contact us for further information.