Mutual Fund Custodian

What Is a Mutual Fund Custodian?

A mutual fund custodian is a trust company, bank, or similar financial institution that is responsible for holding and safeguarding the securities owned within a mutual fund.

A mutual fund's custodian holds assets for safekeeping and can also provide a range of services including fund administration, fund accounting, legal, compliance, tax support, and transfer agency services.

Key Takeaways

  • Mutual fund custodians are responsible for securing and managing the securities held within a mutual fund.
  • While a fund's portfolio manager makes trading decisions, the securities owned by the fund are held with the custodian and not directly with the fund itself. This is done to reduce the risk of fraud.
  • In addition to holding securities and record-keeping, a custodian also typically offers trade settlements, foreign exchange transactions, and tax services for its clients.

An Introduction To Mutual Funds

Understanding Mutual Fund Custodians

Mutual fund custodians work with mutual funds through third-party arrangements. Since a mutual fund is essentially a large pool of funds from many different investors, it requires an additional entity to hold and safeguard the securities that are mutually owned by all the fund's investors.

The Securities and Exchange Commission (SEC) has specific rules and requirements governing the custody of mutual funds which leads most investment companies to work with a third-party custodian for compliance. Regulations for custody of mutual fund assets were revised in 2009 to ensure even greater transparency and safety of investments for investors. These regulations are primarily outlined in rule 206(4)-2 of the Investment Advisors Act of 1940. The 1940 Act regulations are in place to help mitigate the risks of fraudulent or dishonest activity by investment companies and fund managers.

Mutual Fund Custodian Services

Mutual fund custodians work with mutual fund companies around the world. Global custodians must adhere to varying regulations in individual countries.

Mutual fund custodians can offer a broad range of services. Typical offerings include fund accounting, administration, legal, compliance, and tax services. Mutual fund custodians also work with transfer agents or provide their own transfer agency services to maintain records of shareholder transactions and balances. Mutual funds typically outsource most of their back-office operations to custodians for cost efficiency and convenience. Mutual fund administration and accounting are important aspects of a mutual fund’s operations.

Fund accountants are responsible for calculating daily fund net asset values. Fund administrators are also responsible for numerous activities involved with the underlying securities of the mutual fund including corporate actions and proxy voting.

Examples of Mutual Fund Custodians

Many global financial firms offer custody services for all types of investments including stocks, bonds, mutual funds and exchange-traded funds.

For example, in 2016, Bank of New York Mellon was the largest global custodian with total assets under custody of $25.08 trillion for the 12 months through June 2016. State Street ranked second with $21.35 trillion in assets under custody; and J.P. Morgan ranked third with $20.47 trillion in assets under custody.

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  1. U.S. Securities and Exchange Commission. "Custody of Funds or Securities of Clients by Investment Advisers," Page 11. Accessed June 9, 2021.

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