One emerging market specialist recalls how he helped to raise $1 million by way of a capital increase for a Romanian company. "Taking delivery of the allotted securities," he recalls, "meant standing at the factory gates, holding a bag to put them in, with a couple of heavies for protection, and bringing the securities back on the plane." In transactions such as these there is a form of custody called broker custody which means that the broker will deposit the securities in a local bank. But whether such arrangements qualify as good custody is questionable since the securities cannot be easily accessed. In some cases the securities are held by the issuing company itself - hardly a prudential arrangement by western standards.
Custody requirements emanate from the US. The Investment Company Act 1940 and the Employee Retirement Income Security Act (ERISA) 1974 each provide a set of rules. The 1940 Act applies to mutual funds; ERISA to corporate pension plans. The two sets of rules say, broadly, that custodians of these funds' assets must be of high calibre, good conduct and adequate capitalization. These requirements are referred to collquially as "17(f)5" after the particular rule in the 1940 Act.