03.17 – Segregated Accounts

Where an investment manager (see 2.28a) is appointed to provide direct investment management services by the legal owner of assets, as segregated accounts, then these accounts are not Financial Accounts of the investment manager, but instead are treated as Custodial Accounts of a Custodial Institution (who will need to treat the investors as their account holders as there is no interposing fund).

Note that in cases where an investment manager also holds assets on behalf of clients (by acting as a Custodial Institution), reporting will be required on those accounts by the investment manager falling within the definition of a Custodial Institution.

There will be situations where an investment manager does not hold custody for its customers (e.g. investment managers who arrange for custody as agent on their customers’ behalf or where the custody accounts are pooled nominee accounts) but holds the information required for due diligence and reporting.

The investment manager will be the reporting Financial Institution for those accounts by its status as an Investment Entity where:

  • it alone has direct knowledge of its customers and their accounts and
  • it carries out the AML/KYC procedures on those accounts.

Fully disclosed clearing and settlement (Model B)

Where wealth management services are provided, it is not uncommon for these Financial Institutions to enter into arrangements designed to facilitate the clearing and settlement of security transactions utilising a third party provider’s existing information technology infrastructure ‘IT’ systems, specifically those that interface with the international securities settlement and clearing systems (clearing firms).

A tri-partite relationship between the underlying customer, the broker/wealth manager and the clearing firm is created, by virtue of the fact that the broker has entered into a fully disclosed clearing relationship with the clearing firm on his own behalf, and, acting as the agent of its underlying client.

For the avoidance of doubt where a broker/wealth manager has opened an account (or sub-accounts) with the clearing firm, in the name of its underlying client and fulfils all verification, due diligence and reporting requirements on its underlying clients then the Financial Accounts remain the responsibility of the broker/wealth manager and not the clearing firm.

The broker/wealth manager may allow the clearing firm to undertake the reporting on its behalf.

The clearing firm, however, will treat the broker/wealth manager as its client (as it is a Financial Institution) and consequently as the person for which it maintains a Financial Account and will undertake reporting and classification accordingly.

The term broker/wealth manager in respect of fully disclosed clearing and settlement would include any Financial Institution who acts on behalf of the underlying investor in respect of executing, placing or transmitting orders and would, therefore, include financial advisers if their business is more than simply advisory.