The independent status and supervisory responsibilities of fund custodians have always been controversial. Especially after the FuqingxiSeries incident, whether fund custodians should bear joint and several liability as co-trustees has caused great disputes. This article believes that fund custodians should act as the only trustees and take responsibilities independently rather than as co-trustees. In terms of supervisory scope, in addition to legal provisions and contractual agreements, fiduciary norms should also be included. For public funds, contracts can only refine supervisory duties, while for private funds, contracts may partially exempt but not completely exempt them. As for supervisory criteria, they should be dynamically determined based on maximizing the interests of beneficiaries. Regarding the liability for breach of supervisory duties, it depends on the specific fault forms between custodians and managers.
Fund custodians should act as the only trustees rather than co-trustees
The legal status of fund custodians is the only trustee instead of co-trustees with fund managers. Because they do not jointly own fund assets nor handle fund businesses together with managers. Besides, according to Article 145 of the Securities Investment Fund Law, several liability shall apply in principle in the fund industry, with joint liability as an exception. Fund managers, who have transferred discretion but do not own fund assets either, shall be identified as de facto fiduciaries. Consequently, lacking the institutional basis for joint liability, the responsibilities of custodians and managers shall be judged separately.
The supervisory scope of custodians includes legal provisions, contractual agreements and fiduciary norms
In addition to statutory duties, the supervisory responsibilities of custodians may also stem from fund contracts. However, disclaimer clauses are prevalent in practice, especially in the private fund area. For public funds, fund contracts can only specify the abstract supervisory obligations. While for private funds, fund contracts may partially but not completely exempt supervisory duties based on the fiduciary law theory, so as to avoid exacerbating information asymmetry and weakening the governance function of fiduciary norms.
The supervisory criteria shall be dynamically determined based on maximizing the interests of beneficiaries
The supervisory criteria should not be mechanically divided into form supervision and substance supervision. Instead, a spectrum of different levels of criteria should be established at first, including the review of formal completeness, formal validity, contractual compliance, legal compliance and reasonableness. Afterwards, based on maximizing the interests of beneficiaries and considering the supervision capability, cost, management fee rates and legal risks of custodians, appropriate criteria shall be selected dynamically in specific cases.
The liability for breach of supervisory duties depends on the specific fault forms
When custodians and managers jointly act with consensus, they shall bear joint liability. When managers intentionally breach agreements and custodians negligently fail to supervise, supplementary liability shall apply to custodians. When both parties are negligent or managers are negligent while custodians are intentional, proportional liability shall be borne considering the degree of faults and the amount of custody fees.
In summary, fund custodians shall act independently rather than jointly with fund managers. Their supervisory scope and criteria shall be determined appropriately instead of mechanically. The liability for breach of supervisory duties shall depend on specific fault forms.