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A bond trustee is a financial institution that has been empowered by a bond issuer to regulate the terms and conditions that apply to the bond or trust indenture. Institutions such as trust companies or commercial banks often function in this capacity, effectively managing the contract that exists between the bond issuer and the investors who purchase the bonds. The bond trustee is usually responsible for several key functions that benefit both the issuer and the bondholder, and is required to carry out those functions in compliance with any governmental regulations that may apply.
One of the main functions that the bond trustee manages on behalf of the bond issuer is the registration process. This includes registering the issue with the appropriate regulatory agency, assessing the costs of registration, and notifying the issuer of those charges. The trustee also acts as the agent to collect payments from investors when they choose to purchase the bond, and create the account information necessary to ensure the bond holder receives interest payments according to the terms and conditions that govern the bond issue.
It is not unusual for a bond trustee to monitor the current status of the documents connected with the bond. This helps to ensure the bond issue meets any governmental requirements that may have come into being since the bond was first issued. In some countries, the provisions of bond issues are not grandfathered; that is, the fact that a bond was written before a given regulation was put into effect does not exempt the bond from complying with that new regulation. This creates a situation where the terms of the issue may have to be updated, if that new regulation affects one or more provisions within the bond documents.
A bond trustee is also likely to issue periodic statements to bond holders. The frequency of the statements depends on how the return is calculated. In some cases, the statements are issued on a monthly basis. At other times, the statements may be issued quarterly or semi-annually. The schedule that governs the issuance of statements, including their frequency and content, is determined by the terms found in the bond documents.
The bond trustee may also function as an advocate for the investor, if the bond issuer fails to comply with the provisions of the bond issue. Depending on the laws that apply in the area where the trustee and the issuer are located, the bond trustee may take steps to recover any amount owed to the investor. Other forms of legal action necessary to protect the reputation of the trustee may also be allowed, depending on local laws. Any institution authorized to function as a bond trustee must maintain a staff that is large enough to manage all the assigned functions. The institution must also ensure the staff is knowledgeable enough for the bond issue to remain in compliance with any local, state, or national regulations that may be in effect at any point during the life of the bond.
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