A custodian bank is a special financial institution that carries the responsibility for protecting the financial assets of individuals or companies. These institutions can also be called simply custodians. Such outfits serve as a third party check that protects the assets they are guarding against the fund managers and any illegal activities they may pursue.
Congress established these custodian banks with the Investment Company Act of 1940 in order to protect investors. Thanks to this particular legislation, investment companies must adhere to specific stringent listing requirements and must be registered with the Securities and Exchange Commission.
The custodian bank performs a number of activities in their primary function of watching over the financial assets of businesses and individuals. They settle sales and purchases of bonds and equities and physically protect the certificates of these assets. These institutions also gather information about and income from such assets. When the assets are stocks this means dividends. When the instruments are bonds, they collect the interest from the coupons. The custodians also disperse information they gather, pertaining to yearly general meetings and shareholder voting. They handle any foreign exchange transfers as necessary and manage all cash transactions. Finally, custodians deliver routine reports on their various activities to the customers.
Custodians banks provide reports on every trade or deal which they transact on behalf of the clients. They must be consistently delivered. Along with these reports they furnish information on the companies whose assets they hold besides information on general meetings. When a custodian is holding foreign shares or bonds, they will also have to change currencies as necessary. This is the case when the fund manager buys or sells foreign currency assets. It is also necessary when companies pay out dividends or bonds receive interest with these overseas financial instruments. Custodian banks are a critical component of the modern investment environment. Without them to carry out these functions, all of the important financial record keeping and housekeeping items would be neglected.
Not all custodian banks are national operations in the United States. A number of the major international financial institutions offer these services around the globe. These are called global custodians. Such international outfits use their own branches in the various countries in which they operate to manage the accounts and assets for their customers. In other cases, they may employ other custodians to assist them with these services. In these types of situations, the customer assets will be held by pension funds.
There are also local custodian banks whose job is to handle the ADR American Depository Receipts. These stock certificates are from foreign based companies that wish to offer their securities to the American stock markets. There are a number of international and large national American banks that participate as these local custodians. Among them are BNP Paribas, PFPC (a subsidiary of PNC Financial Services Group), Brown Brothers Harriman and Company, Kaupthing Bank, Citigroup, Northern Trust, Credit Suisse, RBC Dexia, Societe Generale, State Street Corp., German Bank AG, Goldman Sachs, HSBC, The Bank of New York Mellon, UBS AG, Union Bank of California, JPMorgan Chase Bank, and TO Bank NV.