Custodians

Lesson

Custodians are financial institutions that hold customers' securities for safekeeping to minimize the risk of theft or loss. They also provide various services like account administration and transaction settlements.

Practice Question #1

Which of the following services is NOT typically provided by a custodian?

A) Safekeeping of securities

B) Account administration

C) Investment advice

D) Tax support

Select an option above to see an explanation here.

A) Safekeeping of securities is a primary function of custodians. B) Account administration is a service provided by custodians. C) Investment advisers, not custodians, provide investment advice. D) Tax support is a service provided by custodians.

Terms

Custodian:: A financial institution that holds customers' securities for safekeeping to minimize the risk of theft or loss.
Account Administration:: Services provided by custodians to manage clients' accounts, including recordkeeping and reporting.
Transaction Settlement:: Completing a trade by transferring securities and cash between the buyer and seller.
Transfer Agent:: A company that maintains securities ownership records and handles securities transfer between parties.
Depository:: A facility where securities are held for safekeeping and can be transferred between parties through a book-entry system.
Book-Entry System:: A method of recording securities ownership electronically rather than using physical certificates.

Practice Question #2

What is the primary purpose of a custodian in trading securities?

A) To provide investment advice

B) To execute trades on behalf of clients

C) To hold and protect clients' securities

D) To develop financial plans for clients

Select an option above to see an explanation here.

A) Investment advisers, not custodians, provide investment advice. B) Executing trades is typically done by broker-dealers rather than custodians. C) The primary purpose of a custodian is to hold and protect clients' securities. D) financial planners, not custodians, develop financial plans.

Do Not Confuse With

Broker-Dealer:: A firm that buys and sells securities on behalf of clients and for its account.
Investment Adviser:: A professional providing investment advice and managing clients' portfolios.

Practice Question #3

Which of the following is a key difference between a custodian and a broker-dealer?

A) A custodian provides investment advice, while a broker-dealer does not.

B) A custodian holds clients' securities for safekeeping, while a broker-dealer executes trades.

C) A custodian develops financial plans for clients, while a broker-dealer manages clients' investment portfolios.

D) A custodian clears and settles transactions, while a broker-dealer maintains records of securities ownership.

Select an option above to see an explanation here.

A) Investment advice is provided by investment advisers, not custodians or broker-dealers B) A custodian holds clients' securities for safekeeping, while a broker-dealer executes trades on behalf of clients. C) Developing financial plans is done by financial planners, not custodians or broker-dealers. D) Clearinghouses clear and settle transactions while transfer agents maintain records of securities ownership.

Historical Example

In the 1970s, a major financial institution faced a crisis when it was discovered that some employees had stolen clients' securities from the vault. This incident highlighted the need for better safekeeping practices and led to financial institutions' widespread adoption of custodial services.