In a recent response to the Investment Adviser Association, the SEC’s Division of Investment Management has issued a no-action letter stating that Registered Investment Advisers (RIAs) with Standing Letters of Authorization (SLOA) from clients are considered to have regulatory custody of their assets. The letter, however, does provide relief from the surprise exam requirement of the Custody Rule (Rule) for these accounts if an RIA meets certain conditions.
Up until now, the issue of SLOAs creating custody under the Rule has been an area of confusion, with varying interpretations among advisors and their legal counsel as to whether they are subject to the requirements of the Rule. The conditions, as enumerated below, provide advisors and their legal counsel with a framework as to what needs to be in place between the client, advisor and qualified custodian to qualify for relief.
Such conditions include:
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.
The client authorizes the investment advisor, 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.
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.
The client has the ability to terminate or change the instruction to the client’s qualified custodian.
The investment advisor 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.
The investment advisor maintains records showing that the third party is not a related party of the investment advisor or located at the same address as the investment advisor.
The client’s qualified custodian sends the client, in writing, an initial notice confirming the instruction and an annual notice reconfirming the instruction.
While the no-action letter provides some clarification and relief, advisors will continually need to be diligent in their oversight of client accounts having SLOAs to ensure that conditions are met to fall under the relief provided. This likely will entail significant, on-going communication with the qualified custodians involved with these accounts. As part of this release, the SEC also updated its staff’s Responses to FAQ (response to question II.4) as well.
Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.
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