Home News Sponsored: Understanding Custody – Private vs. Publicly Offered Fund Vehicles

Sponsored: Understanding Custody – Private vs. Publicly Offered Fund Vehicles

By: Amy Small, Senior Vice President, Executive Director of Institutional Custody at UMB Bank

By: Amy Small, Senior Vice President, Executive Director of Institutional Custody at UMB Bank

“Custody” means something different for registered fund vehicles than for private funds, public non-traded real estate investment trusts or business development companies. This can lead to confusion for managers launching a strategy as a registered mutual fund (whether an interval fund, tender fund, or a daily net asset value fund). Understanding the differences can also help alternative-fund managers evaluate whether bank-custodian services may add value to their offering when not required.

Institutional custody is required for registered fund assets

Private fund managers are typically familiar with custody services provided by their prime brokers as part of a suite of services to support their private funds. Custody for registered funds, on the other hand, is typically provided by a bank custodian—and is quite different in both the nature of services and fees.

Custody requirements for registered funds are governed by the Investment Company Act of 1940, commonly known as the ’40 Act, which requires a third-party entity—a bank or a limited-purpose trust company—to safekeep investors’ assets to minimize the risk of theft or loss. This is the first and foremost purpose of a custodian.

In addition, bank custodians provide transactional processing, including facilitating trade settlement, collecting income, processing corporate actions, executing foreign exchange transactions, and providing daily cash investment options. The custodian may also complete subscription documents and documentation to meet AML requirements, as well as custody electronic documents.

In the private-fund space, prime brokers typically provide a subset of these services—but the business model revolves around the broker charging for that service as part of a spread. Because custody is bundled into that spread, some managers aren’t accustomed to thinking of custody among the costs of doing business.

How private funds benefit from a bank custodian, even when not required

Alternative funds not regulated under the ‘40 Act may still wish to partner with a qualified custodian other than their prime broker depending on the needs of their portfolio or investor demand.

Institutional and other qualified investors may prompt a manager to ensure their assets are safeguarded. A bank custodian, like UMB, has standardized, proven processes for handling assets that make investors more confident about their investment decisions.

Also, custodians have further branched out into complementary financial services, such as investment accounting, administration, tax services, foreign exchange services, treasury services and investment management. More recently, custodians have become providers of data to their clients. Using straight-through processing capabilities, a custodian is able to take in multiple data sources related to their customer’s investments, repackage that data, and transmit it to customers and their agents. Bank custodians like UMB may also be able to support alternative managers even further throughout the investment lifecycle with traditional banking and escrow services, investor servicing and fund administration.

As alternative managers adapt to market conditions, investor demand, digital assets and more, they will continue to seek solutions to ensure the safe handling of client assets.

About UMB

As one of the nation’s leading custodians, UMB Institutional Custody provides an array of solutions for insurance companies while integrating custody with other back-office services offered by UMB to achieve greater efficiency and seamless coordination. Our technology platforms enhance our processing capabilities and allow our experienced administrators to provide high-quality, proactive client servicing for trade settlement, corporate actions, other securities and cash/currency movement in your portfolios.

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UMB is a sponsor of The DI Wire, and the article was published as part of their standard directory sponsorship package.