Custodian Bank Law and Legal Definition

Custodian bank is a financial institution having supervision over banks and which acts as custodian for a clearing corporation. Custodian banks were setup under the Investment Company Act of 1940 for protecting investors. The bank is supervised and examined by a state or federal authority. A custodian bank acts as a third party watchdog responsible for protecting investors' assets from any illegal activities of the fund manager. A custodian bank is a bank responsible for safeguarding a firm’s or individual’s financial assets.

As a custodian the bank functions:

  • to hold in safekeeping assets such as equities and bonds;
  • arranges settlement of any purchases and sales of such securities;
  • collect information on and income from such assets;
  • provide information on the underlying companies and their annual general meetings;
  • manage cash transactions;
  • perform foreign exchange transactions where required; and
  • provide regular reporting on all their activities to their clients.

The bank act as global custodian when the bank holds assets for their clients in multiple jurisdictions.