Define: Covered Account

What Covered Account Means in a Contract

A Covered Account is a defined term used to identify which accounts within a broader relationship trigger specific contractual obligations. Typically, it refers to an account set up by a financial intermediary, such as a broker, custodian, or transfer agent, for the purpose of executing transactions, holding securities, or tracking beneficial ownership on behalf of a client or investor. The definition draws a boundary around which accounts are subject to particular rules, reporting duties, or protective measures set out elsewhere in the agreement.

The concept matters because financial and account-based contracts often involve multiple types of accounts serving different purposes. Without a clear definition, parties could dispute whether a given account, such as a settlement account, a custody account, or an omnibus account, falls within the scope of obligations like recordkeeping, disclosure to regulators, or identity verification. Framing the term precisely allows both parties to know exactly which accounts are governed by the contract's substantive provisions.

How Covered Account Is Defined or Measured

Most agreements define a Covered Account by reference to three elements: who established it, what it holds, and for whose benefit it operates. An account created by a financial intermediary for conducting transactions, holding covered securities, or reflecting beneficial ownership generally satisfies the definition. Some contracts narrow the scope further by listing specific account types, such as brokerage accounts, custodial accounts, or nominee accounts, while excluding others like internal operating accounts that hold no client assets.

Measurement in this context is less about quantitative thresholds and more about functional classification. Drafters typically ask whether the account holds securities or assets belonging to, or beneficially owned by, a third party, and whether the intermediary exercises control or custody over those assets. If both conditions are met, the account is usually treated as covered, regardless of its size or the frequency of activity within it.

• Accounts holding securities for client benefit
• Accounts used to settle or clear transactions
• Accounts reflecting beneficial ownership interests

Where Covered Account Appears in Agreements

The term commonly appears in custody agreements, brokerage agreements, and other financial services contracts where an intermediary manages assets on behalf of another party. It is also relevant in