Investing in the World: Squaring Custody Practices in China, Russia and Saudi Arabia with the 1940 Act

April 01, 2017

The rationale for investing in emerging markets is often clear: returns on equities often climb into the double-digits and yields on fixed-income often dwarf what bonds in developed markets can eke out. But so, too, are the risks: greater volatility, confiscatory, unpredictable and arbitrary government action against securities issuers, and occasional outright fraud.

But under the flexible approach of the Investment Company Act of 1940 (1940 Act), the decision of whether to invest in emerging markets is left largely to the judgment of fund boards and managers. Unlike fund regulatory regimes in some jurisdictions, the 1940 Act largely does not prescribe classes of investments or prohibit risk—rather, it encourages disclosure to let investors determine their own tolerance for uncertainty. The 1940 Act approach to custody displays similar flexibility: investor assets must be protected but the approach to this fundamental task necessarily must vary with the needs of each market.

This article outlines the basic structure of the 1940 Act’s non-US custody rules, how they have changed over time with respect to markets that feature custody challenges (namely Russia and China), and how they might apply as new markets, such as Saudi Arabia, open up.

Read "Investing in the World: Squaring Custody Practices in China, Russia and Saudi Arabia with the 1940 Act."