Custodian

A custodian is the institution that actually holds investors’ securities in safekeeping, today almost always in electronic form, and keeps the records of who owns what. It settles trades, collects dividends and interest, processes corporate actions such as stock splits and handles tax paperwork such as withholding tax reclaims. Large banks act as custodians for funds, pension schemes and brokers; a broker may act as custodian for its own clients or use a third-party custodian. Securities are typically registered in a nominee name, with the broker’s or custodian’s records showing the underlying investors as the beneficial owners.

Custody matters because it determines what happens if something goes wrong. Rules in most major markets require client assets to be segregated from the firm’s own assets, so that if a broker or custodian becomes insolvent, clients’ securities are not available to its creditors and should be returned, although recovery can take time and some administration costs may be deducted. If records are wrong or assets are missing, an investor compensation scheme may cover some of the shortfall up to a limit. Custody protects against the firm’s failure, not against the investments themselves falling in value.