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  • CL-2 CL-2 Custody Services

    • CL-2.1 CL-2.1 General Requirements

      • CL-2.1.1

        The rules in this section apply to investment firm licensees that undertake safeguarding of client financial instruments.

      • CL-2.1.2

        An investment firm licensee which holds or controls safe custody financial instruments must have systems and controls in place to:

        (a) Ensure the proper safeguarding of such safe custody financial instruments;
        (b) Ensure that such safe custody financial instruments are identifiable and secure at all times;
        (c) Be able to evidence compliance with the requirements in Section CL-2 to its external auditors and the CBB.
        Amended: January 2007

      • CL-2.1.3

        As part of these protections, the custody rules require an investment firm licensee to take appropriate steps to protect safe custody financial instruments for which it is responsible. These rules are designed primarily to restrict the commingling of client and investment firm licensee assets and minimise the risk of the client's safe custody financial instruments being used by the firm without the client's agreement or contrary to the client's wishes, or being treated as the investment firm licensee's assets in the event of insolvency.

    • CL-2.2 CL-2.2 Segregation

      • CL-2.2.1

        An investment firm licensee must segregate safe custody financial instruments from its own financial instruments except to the extent required by law or permitted by this module.

    • CL-2.3 CL-2.3 Reconciliation

      • CL-2.3.1

        An investment firm licensee must, as often as is necessary, but at a minimum on a monthly basis, perform a reconciliation of its record of safe custody financial instruments for which it is accountable but which it does not physically hold, with statements obtained from custodians. In the case of dematerialised safe custody financial instruments not held through a custodian, this reconciliation must be performed with statements obtained from the person who maintains the record of legal entitlement.

        Amended: July 2008

      • CL-2.3.2

        An investment firm licensee must, as often as is necessary, but no less than every six months (or twice in a period of twelve months but at least five months apart), carry out:

        (a) A count of all safe custody financial instruments it physically holds on behalf of clients and reconcile the result of that count with its record of safe custody financial instruments that it physically holds on behalf of its clients; and
        (b) A reconciliation between the investment firm licensee's record of client holdings, and the firm's record of the location of safe custody financial instruments.
        Amended: January 2007

      • CL-2.3.3

        Wherever possible, an investment firm licensee should ensure that the reconciliations are carried out by a person (for example an employee of the investment firm licensee) who is independent of the production or maintenance of the records to be reconciled.

    • CL-2.4 CL-2.4 Client Statements

      • CL-2.4.1

        Before investment firm licensees provide safe custody services to a client, they must notify the client as to the appropriate terms and conditions which apply to this service. These must cover, at a minimum, the following matters, wherever applicable:

        (a) The registration of the safe custody financial instruments, if these are not registered in the investment firm licensee clients' name;
        (b) The extent of the investment firm licensees' liability in the event of default by a custodian, except that the investment firm licensee must accept the same level of responsibility to its client for any nominee company controlled by the investment firm licensee or its affiliated company as for itself and may not disclaim responsibility for losses arising from the fraud, wilful default or negligence of the firm;
        (c) The circumstances in which the investment firm licensee may realise a safe custody financial instrument held as collateral to meet the client's liabilities;
        (d) The claiming and receiving of dividends, interest payments and other entitlements accruing to the client;
        (e) Dealing with takeovers, other offers or capital reorganisations and exercising voting, conversion and subscription rights;
        (f) Arrangements for the distribution of entitlements to shares and any other benefits arising from corporate events, where client balances have been pooled;
        (g) Arrangements for the provision of information to the client relating to the safe custody financial instruments which the investment firm licensee, or its nominee company, holds on behalf of the client;
        (h) How often a statement of custody assets will be sent to the client and the basis on which the assets shown on the statement are valued;
        (i) Fees and costs for safe custody services to the extent that they are not notified to the client elsewhere; and
        (j) If the firm intends to pool a safe custody financial instrument with that of one or more other clients, notification of its intention and, if the client is a retail client, an explanation of the effects of pooling to that retail client.
        Amended: January 2007

      • CL-2.4.2

        All statements produced by or on behalf of an investment firm licensee must list all safe custody assets held for the client and for which the investment firm licensee is accountable and:

        (a) Identify any safe custody financial instruments registered in the client's own name separately from those registered in any other name;
        (b) Identify any safe custody assets which are being used as collateral or have been pledged to third parties, separately from any custody assets;
        (c) Show the market value of any collateral held, as at the date of the statement;
        (d) For a retail client, base the statement on either trade date or settlement date information for cash balances and safe custody investment and notify the basis to the retail client; and
        (e) Details of movements of each client asset.
        Amended: January 2007

    • CL-2.5 CL-2.5 Third Party Custodians

      • CL-2.5.1

        An investment firm licensee must require that if a safe custody financial instrument is recorded in an account with a custodian, the custodian makes it clear in the title of the account that the safe custody financial instrument belongs to one or more clients of the investment firm licensee.

      • CL-2.5.2

        Before an investment firm licensee recommends a third party custodian to a retail client it must undertake an appropriate risk assessment of that custodian.

      • CL-2.5.3

        An investment firm licensee that holds safe custody financial instruments with a custodian or recommends custodians to retail clients, is expected to establish and maintain a system for assessing the appropriateness of its selection of the custodian and to assess the continued appointment of that custodian periodically as often as is reasonable in the relevant market. The investment firm licensee is also expected to make and retain a record of the grounds on which it satisfies itself as to the appropriateness of its selection or, following a periodic assessment, continued appropriateness of the custodian.

      • CL-2.5.4

        In undertaking an appropriate risk assessment of the custodian in accordance with CL-2.5.2, investment firm licensees may take into account any or all of the following:

        (a) The expertise and market reputation of the custodian, and once a safe custody financial instrument has been lodged by the firm with the custodian, the custodian's performance of its services to the investment firm licensee;
        (b) The arrangements for holding and safeguarding financial instruments;
        (c) An appropriate legal opinion as to the protection of custody assets in the event of insolvency of the custodian;
        (d) Current industry standard reports;
        (e) Whether the custodian is regulated and by whom;
        (f) The capital or financial resources of the custodian;
        (g) The credit rating of the custodian; and
        (h) Any other activities undertaken by the custodian and, if relevant, any affiliated company.
        Amended: January 2007

    • CL-2.6 CL-2.6 Record-Keeping

      • CL-2.6.1

        An investment firm licensee must ensure that proper records of the custody assets which it holds or receives, or arranges for another to hold or receive, on behalf of the client, are made and retained for a period of ten years after the account is closed.

        Amended: April 2008

      • CL-2.6.2

        For the purpose specified in CL-2.6.1, an investment firm licensee must maintain proper records in relation to a client account; these records must capture at a minimum the following details:

        (a) The name of the account;
        (b) The account number;
        (c) Type of account;
        (d) Type of asset;
        (e) The location of the account;
        (f) Whether the account is currently open or closed;
        (g) Details of assets held and movements in each account; and
        (h) The date of opening and where applicable, closure.
        Amended: January 2007

      • CL-2.6.3

        Detailed record-keeping requirements are contained in Module GR (General Requirements) and Module FC (Financial Crime).