What are the obligations of a global custodian service provider in giving investment advice to its clients?

In Första AP-Fonden v Bank of New York Mellon SA/NV and others [2013] EWHC 3127 (Comm), the Commercial Court considered the advisory obligations of a global custodian service provider and determined that the service provider had fallen short of its own reporting standards and that it had failed to present to the claimant the risks of default and loss in a fair manner and what alternatives there were to holding securities to maturity.

The claimant (Första) is one of five ‘buffer funds’ within the Swedish pension system. In October 2004, Första entered into a global custody agreement and subsequently, in December 2004, a securities lending authorisation agreement (SLAA) with the defendant bank (BNYM), under which BNYM managed Första’s securities lending programme. Various investment guidelines were incorporated into the SLAA. After initial negotiations, BNYM and Första had relatively limited direct contact. BNYM provided daily online reports to Första on the securities held in its cash re-investment portfolio. Reviews took place every six months to discuss the performance of the medium-term notes (MTNs).

Sigma Finance was added to BNYM’s approved list of issuers in August 2005. On five different occasions between March 2007 and October 2008, BNYM acquired MTNs from Sigma for Första’s account. BNYM did not seek Första’s approval for the acquisition nor was it required to do so under the terms of the SLAA. In around May 2007, BNYM became increasingly aware of potential problems with the Sigma securities. After a downgrade of the securities by the rating agencies and a steep reduction in their pricing, in May 2008 BNYM contacted Första about Sigma and the MTNs. Following this approach by BNYM, Första tightened its investment criteria but continued to hold the Sigma securities…

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