How Is American Century Investments Affected by Recent Bank Failures?
Investors are wondering how financial companies have been affected by the recent regional bank failures—and what might happen in the event of a broader financial crisis.
American Century Investments portfolios have had limited exposure to recent regional bank failures.
Mutual funds are not covered by insurance such as FDIC or SIPC, but they are subject to other protections.
Custodian banks hold mutual fund assets. In the event of a bank failure, the assets would be moved to another bank.
Were American Century’s Portfolios Impacted?
American Century’s exposure to the affected banks was limited. Across our portfolios, analysts are reviewing our banking exposure to ensure our holdings appear financially sound and aligned with each portfolio’s objectives.
Regarding the possibility of further shocks to the financial system, it’s important to note that mutual funds are not subject to the same protections as bank accounts. We address the differences and what it means for you.
Are American Century Mutual Funds Covered by Insurance Like Bank Accounts?
Our mutual funds are not covered by insurance such as Federal Deposit Insurance Corporation (FDIC) that covers banks and thrift institutions or Securities Investor Protection Corporation (SIPC) that covers brokerage accounts. (American Century Brokerage accounts are covered by SIPC.)
Clients are protected by the way mutual funds are organized and governed. The Investment Company Act of 1940 sets strict requirements concerning the custody of the securities in each fund. The Securities and Exchange Commission (SEC) requires mutual fund custodians to protect the fund assets by segregating them from the other assets held by the custodian.
In short, each of our funds is considered a separate company from American Century Investments itself. The assets are held by a custodian bank and not by American Century.
Are American Century Mutual Funds Protected in the Event of a Bankruptcy?
Each of our funds is considered a separate company from the fund’s investment adviser. Each fund’s securities are held by a custodian—currently State Street Bank and Trust Company—and the custody accounts are registered in the fund’s name. Creditors of the bank or the fund’s investment adviser would have no claim to assets in these custody accounts.
On the outside chance of an American Century bankruptcy, the fund boards would be responsible for getting new advisors for the funds (the most likely scenario) or arrange for the liquidation of the underlying securities of the funds to be distributed back to shareholders.
What Is the Role of a Custodian Bank?
Custodian banks hold a fund’s securities and settle transactions but don’t hold the assets in a bank account subject to the FDIC insurance limits. In the event the custodian bank fails, we would move the custodianship to a new bank.
Not only does the custody agreement require segregation of fund assets from those of other entities, but the SEC rule applicable to fund custody agreements is very specific about the authority of the custodian when dealing with fund assets. Rule 17f-1(b) requires that the agreement with the custodian always maintain fund securities and investments in individually segregated accounts that are clearly identified as property of the fund.
The rule also provides that the custodian shall have no power to transfer, pledge or otherwise dispose of these fund assets except pursuant to the direction of the fund and only for the account of the fund. The custodian bank is required by the agreement to maintain fund accounts pursuant to these rules.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.