How an OFC’s Scheme Property Is Held

An open-ended fund company has a distinct legal personality, but its scheme property still needs independent safekeeping. The framework assigns separate roles to the OFC, its directors, investment manager, and custodian. A common exam error is to treat the investment manager as the party that physically holds fund assets.

The custodian’s role

The OFC must entrust its scheme property to a custodian that satisfies the eligibility and appointment requirements in the Securities and Futures (Open-ended Fund Companies) Rules and the SFC Code on Open-ended Fund Companies. The custodian safeguards the property and performs the custody functions required by the framework and the constitutive documents.

Segregation protects fund assets

The custodian must maintain the scheme property separately from its own assets and maintain records that identify property held for the OFC. Segregation supports clear ownership records and helps protect the fund if the custodian encounters financial difficulty. Specific arrangements depend on asset type and custody method.

Investment management is a different function

The investment manager makes or implements investment decisions within its mandate. The custodian holds or oversees the custody of scheme property. Operational delegation does not erase either party’s regulatory responsibilities, and the OFC’s directors retain governance and oversight duties under the applicable framework.

Custodian is a separate control role

An open-ended fund company has a custodian responsible for holding the scheme property. The custodian is appointed under the OFC framework and must meet the eligibility and regulatory requirements set by the SFC. This function is distinct from the investment manager’s authority to make portfolio decisions. The custodian safeguards assets and performs oversight duties prescribed by the rules and Code; it does not become the portfolio manager merely because it holds assets.

What “scheme property” covers

Scheme property is the assets and property attributable to the OFC or its sub-fund, as applicable under the governing documents and OFC rules. The legal and operational arrangements need to keep client or fund property identifiable and protected. The precise form of holding depends on asset type and custody arrangements: securities may be held through accounts or sub-custody chains, while cash and other assets have their own arrangements. A question about title, custody, or segregation is not answered merely by saying the fund “owns” the investment.

Custody and investment management work together

The investment manager makes investment decisions within the mandate; the custodian holds or controls scheme property and performs its statutory and contractual duties. The directors remain responsible for the OFC’s governance. These roles form separate safeguards. Delegation to a sub-custodian does not erase the appointed custodian’s responsibilities under the applicable framework. Likewise, a custodian should not decide whether an investment fits the portfolio simply because it processes settlement. Check the OFC Code and the instrument’s constitutional documents for the exact duties and division of responsibilities.

A practical transaction example

Suppose an OFC buys listed shares. The manager decides to purchase within the fund mandate and transmits instructions. The custodian or its appointed delegate arranges safekeeping and settlement through the relevant account chain, records the asset as fund property, and carries out its oversight responsibilities. If an asset is held through a nominee or sub-custodian, the records and contractual chain should still identify the fund’s interest and support reconciliation. If records do not reconcile, the issue is a custody-control problem even if the original trade decision was proper.

How to spot the exam issue

Look for facts about who chose the investment, who held it, who reconciled it, and who supervised a delegate. A manager’s poor investment decision may raise mandate or conduct issues; missing assets, weak reconciliations, or unsuitable custody arrangements point toward custody and control. An OFC’s board oversight remains relevant in both cases. Avoid treating the custodian as a guarantor against every investment loss: custody safeguards do not remove market risk or make every asset profitable.

Documentation and escalation

The OFC’s instrument, custodian agreement, account records, valuation and reconciliation procedures, and sub-custody arrangements show how the legal duty is implemented. A sound control process identifies assets, reconciles independent records, investigates breaks promptly, restricts unauthorized transfers, and escalates material incidents to the manager, directors, and regulator where required. These operational practices support the statutory objective but do not replace the governing law or SFC requirements.

Segregation and reconciliation

Custody controls should make fund property identifiable apart from assets of the manager, custodian or other funds. Reconciliation compares internal books with independent custody or market records and investigates unexplained differences. Segregation reduces misapplication risk, but the exact legal protection depends on the account structure and asset. It is inaccurate to promise that every arrangement eliminates insolvency risk.

Sub-custody and overseas assets

An OFC may hold assets through sub-custodians or market infrastructure, especially abroad. Delegation calls for due diligence, written terms, monitoring and clear records. The appointed custodian should understand where property is held and what protections apply. Saying “the local agent holds it” does not answer whether the OFC’s scheme property is safeguarded.

Valuation and corporate actions

Custody records support asset existence, settlement, income collection and corporate actions. Valuation remains subject to the OFC’s valuation policy; custody data alone does not establish fair value for every instrument. Reconcile pricing and holdings to avoid stale, missing or duplicated positions. Identify whether a scenario describes custody failure or a separate valuation-control issue.

Market loss is different

Appointment of a custodian is not a guarantee against market loss, issuer default or every act by a remote service provider. The fund remains exposed to investment risk. Distinguish loss from price movement from loss caused by a failure to safeguard, record or oversee property.

Exam takeaway

Match the role to the function: investment manager manages the portfolio; custodian safeguards scheme property. Then recall the core protection: fund assets are held separately from the custodian’s own property under the OFC requirements.