Institute Supports Minimum Performance Standards for Custodians

Washington, DC, September 4, 2002 - The Institute continues to support minimum performance standards for fund custodians, stating that such standards are "necessary and appropriate" in a recent comment letter.

The SEC proposed amendments to Investment Company Act Rule 17f-4 with the intention of modernizing and simplifying the regulatory regime relating to funds' use of securities depositories. In a February 2002 comment letter, the Institute expressed general support for the proposal, and recommended that Rule 17f-4 be amended to establish minimum standards of performance for the discharge by custodians of the duties that are imposed on them with respect to the maintenance of their own financial assets with securities depositories and other securities intermediaries.

In its recent comment letter, the Institute notes that the "due care" performance standard it recommends is the same as the standard automatically applied to custodians under the Uniform Commercial Code (UCC) unless contrary or more specific standards are imposed on them by contract or other law or regulation.

The Institute recommends that the SEC amend Rule 17f-4 to require that a fund's contract with its custodian include a minimum standard of care. Specifically, the contract should provide that the custodian is obligated to exercise due care in accordance with reasonable commercial standards in discharging its duty as a securities intermediary to obtain and thereafter maintain financial assets corresponding to the security entitlements that the custodian establishes for the fund.