Custodian Bank Functions
What are Custodian Banks
A custodian bank acts as a third party watchdog responsible for protecting investors' assets from any illegal activities of the fund manager. Custodian banks were setup under the Investment Company Act of 1940 which was passed by Congress to protect investors. This legislation required investment companies to register with the Securities and Exchange Commission and to meet strict listing requirements.
Function of Custodian Banks with Mutual Funds
Custodian banks are the backbone of the financial community. Greed is one of the biggest emotions triggered from active trading. This mental weakness is exponentially worst when dealing with billions of dollars. So, while we all belive our mutual fund managers are good people, it's only human nature to let the money cloud one's judgment. In order to prevent fund manager's from dipping into their funds holdings, the physical assets of mutual funds are held and monitored by custodian banks. This simple protection makes the following possible:
- Prevents the investors from losing their money if the mutual fund goes bankrupt
- Does not allow the fund to include investor's monies with other company assets
- If the fund is dissolved the custodian bank is responsible for returning funds to investors
Custodian Banks and Net Asset Value (NAV)
Custodian banks have a number of responsibilities, including sending dividends, capital gains, and providing general communications to shareholders. While these are important tasks one of the largest responsibilities is to calculate the NAV of the fund on a daily basis. The NAV is the price per share value of the fund and is the simplest measure of the fund's value. Without the custodian bank, the investor would be relying on the fund manager's team to not only trade their money, but also report the results. So, without custodian banks their would be a conflict of interest in the financial world that would cripple the middle class from creating long-term wealth.