ASIC Regulatory Guides 133 and 166 and implications for Responsible Entities with third party custodians

We recommend that all Responsible Entities (REs) which use external custodians consider whether changes are required to the compliance plans of their registered managed investment schemes in the light of changes to the custodial requirements. This resulted from ASIC class orders [CO 13/761] and [CO 13/1409] which are explained in ASIC Regulatory Guides RG 133 and RG 166.

The new custody agreement requirements deal with matters such as:

    • REs implementing a documented process in selecting an appropriate asset holder/ custodian/ sub-custodian.
    • Agreements with asset holders to include details relating to:
      a. notification by the asset holder to the RE of material or systemic breaches of the agreement by the custodian for the RE’s board and compliance committee to consider;
      b. the asset holder’s business continuity arrangements;
      c. reasonable liability provisions, including appropriate reasonable indemnity provisions in relation to losses caused by the acts and omissions of the asset holder;
      d. termination provisions; and
      e. appointment of sub-custodians.

Note that ASIC expects REs to explain, for retail clients, the limited role of a custodian in any product disclosure statement, financial services guide or IDPS guide.

The commencement date for these new provisions are:

for REs that were authorised to operate a registered scheme prior to 2 January 2014 :

    • for compliance with minimum standards for holding scheme assets – 2 January 2015; and
    • for ensuring that any custody agreement meets the relevant requirements in class order [CO 13/1409] – 1 November 2015;

for all other REs, the provisions commence from date of authorisation of the RE.

These new requirements may require changes to the fund’s constitution and compliance plan, which is a matter for consideration by the Compliance Committee.

We note that some custodians appointed to hold the assets of managed investment schemes are reluctant to amend their compliance verifications and prefer to provide generic confirmations of compliance with RG 166 and the custodial agreements.

Such generic confirmations fall short of what is expected by ASIC if the current agreements do not incorporate the additional requirements set out in RG 133.

Where custodians have declined to change their compliance verifications, REs cannot assume that the Custodians are breaching the Corporations Act. REs have the option of changing custodians if they wish, but that would be a step which requires some investment of time and effort.