Tag Archives: Custody Rule

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. Continue reading Clarification on Custody and SLOA Arrangements

Custody & Safeguarding Client Assets

By Carrie Zippi, CPA

The “Compliance Rule” under the Advisers Act (Rule 206(4)-7) requires RIAs to adopt and implement written policies and procedures reasonably designed to prevent violation, by you and your supervised persons, of the Advisers Act and the rules that the Commission has adopted under the Act. Among other critical areas, these policies and procedures must address the safeguarding of client assets from conversion or inappropriate use by advisory personnel. Continue reading Custody & Safeguarding Client Assets

Custody and Disbursement Authority

By Carrie Zippi, CPA

Rule 206(4)-2 (the “Custody Rule”) of the Investment Advisers Act of 1940 (“Advisers Act”), is one of the most important rules designed to protect advisory clients from the misuse or misappropriation of their funds and securities. Generally any situation where there is a risk of misuse or misappropriation of client assets by an investment advisor, will constitute custody. Many firms continue to operate under the assumption that they do not have custody and are unaware of the many nuances of the Custody Rule which may constitute “custody.”

Let’s examine a common example of custody (i.e., disbursement authority), and areas of risk that continue to confuse advisors. Bill paying services, legal authority, or access to funds via custodian login access (i.e., using the account holder’s login credentials to access the account information online), are all considered custody and would require a surprise custody examination. The SEC however, has provided clarification that an advisor would not have custody in regards to its limited authority to transfer client assets between the client’s accounts (even if the accounts are maintained at different qualified custodians) or to the client’s address of record, if the following conditions are met:

  • The client has granted such authority in writing, with a copy provided to the custodian.
  • The authorization specifies the client account to which the transfer is to be made.
  • The advisor has no authority to open an account on behalf of the client.
  • The advisor has no authority to designate or change the client’s address of record with the qualified custodian unless the advisor reasonably believes that the custodian sent a notice of address change to the client at the client’s old address.

It’s important to note that disbursements made to third parties, such as a standing letter of authorization (“SLOA”), are not always clear and generally constitute custody. The SEC has not formally addressed SLOAs publically, and until they do, advisors should review any SLOAs, especially those with client-designated third-party payees, and consult with legal counsel and compliance professionals as needed.