Standing LOAs Cause Advisers to Have Custody

from Cipperman Compliance Services LLC

The staff of the SEC’s Division of Investment Management, in a recent No-Action Letter, has opined that an adviser has regulatory custody of client assets where a client grants even limited authority to transfer assets to a designated third party. As a result, an adviser who has received standing letters of authorization (SLOAs) from one or more clients must report those assets in its response to Item 9 of Form ADV. The staff will allow such an adviser to dispense with the custody rule’s surprise examination requirement so long as it meets several conditions including ensuring that the third party custodian appropriately verifies the SLOA, provides transfer of funds notices to the client, and sends the client annual reconfirming notices. In companion releases, the staff also provided guidance about transferring assets between custodians and inadvertent custody arising from custodial contracts.

OUR TAKE: The IM staff continues to take a hard line with respect to its broad view of the custody rule regardless of the underlying policy arguments. The relief from the surprise audit may be cold comfort, as we expect few custodians will be willing to spend the resources and subject themselves to additional liability to accommodate SLOAs (without additional fees).

https://www.sec.gov/divisions/investment/noaction/2017/investment-adviser-association-022117-206-4.htm

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