Clarification on Custody and SLOA Arrangements

On 21 February 2017, the SEC’s Division of Investment Management released a new no-action letter in relation to custody and standing letters of authorization (“SLOA”). The Investment Adviser Association (IAA) previously sent a letter to the Division requesting clarification that an investment adviser does not have custody as set forth in Advisers Act Rule 206(4)-2 (the “Custody Rule”) if it acts pursuant to a SLOA or other similar asset transfer authorization arrangement established by a client and qualified custodian. This letter also requested no-action relief under the Custody Rule and surprise custody examination as required by the Custody Rule.

The Division’s response within the Letter indicates that an investment adviser with a SLOA would “have custody of client assets and would be required to comply with the Custody Rule.”  The letter provides relief from the surprise examination requirement for advisers with SLOA arrangements if the following circumstances are met:

  1. The client provides an instruction to the qualified custodian, in writing, that includes the client’s signature, the third party’s name, and either the third party’s address or the third party’s account number at a custodian to which the transfer should be directed.
  2. The client authorizes the investment adviser, in writing, either on the qualified custodian’s form or separately, to direct transfers to the third party either on a specified schedule or from time to time.
  3. The client’s qualified custodian performs appropriate verification of the instruction, such as a signature review or other method to verify the client’s authorization, and provides a transfer of funds notice to the client promptly after each transfer.
  4. The client has the ability to terminate or change the instruction to the client’s qualified custodian.
  5. The investment adviser has no authority or ability to designate or change the identity of the third party, the address, or any other information about the third party contained in the client’s instruction.
  6. The investment adviser maintains records showing that the third party is not a related party of the investment adviser or located at the same address as the investment adviser.
  7. The client’s qualified custodian sends the client, in writing, an initial notice confirming the instruction and an annual notice reconfirming the instruction.

The Letter acknowledges that investment advisers, qualified custodians and their clients will require a “reasonable period of time” to implement the processes and procedures necessary to comply with this relief.

Also of note, the Letter indicates that beginning with the next annual updating amendment after 1 October 2017, an investment adviser should include client assets that are subject to a SLOA that result in custody in its response to Item 9 of Form ADV.

For those firms with SLOA arrangements that have not subjected them to the surprise examination requirements historically, we recommend discussing the seven circumstances addressed above with legal counsel to determine if a surprise examination is needed.  If so, contact Ashland Partners for more information on surprise examinations.

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s