RIA Compliance Custody. In February, 2017 the SEC issued new guidance on Rule 206(4)-2 (the Custody Rule) in three separate communications.
- SEC no action letter dated February 21, 2017, this clarifies that registered investment advisors have custody when acting in accordance with a client’s standing letter of authorization (SLOA) to transfer funds to third parties when the investment advisor has discretion to determine the timing, amount or designated recipient when requesting the transfer;
- SEC IM Guidance Update (February 22, 2017), clarifies that in certain custodial account agreements, the client provides the investment advisor with broad authority to withdraw funds and securities that can result in “inadvertent” custody by the investment advisor;
- SEC Custody Rule FAQs Update (Question II.4) published February 21, 2017, clarifies the SEC does not view an investment adviser’s authority to make limited transfers of client assets between the client’s accounts at one or more qualified custodians to result in custody, subject to certain conditions:
- The client provides the custodian signed instructions that include the third-party’s name and the third-party’s address or account number at the custodian receiving the funds.
- The client provides written instructions to the investment advisor to direct transfers to the third-party on a specified schedule or from time to time.
- The client’s account custodian has a verification process such as signature review (or other reasonable method) to confirm the client’s authorization and sends the client a funds transfer notice after each transfer.
- The client can change or terminate the instructions with the account custodian at any time.
- The investment advisor has no ability or authorization to change the identity of the third party recipient, its address or any other information about the third party contained in the client’s authorization.
- The investment advisor keeps records that document the third-party is not a related party of the advisor or location at the same address.
- The account custodian sends a written notice to the client initially upon receiving the SLOA and then an annual notice reconfirming the instructions.
The SEC did not set a hard date for compliance with the new guidance, instead “suggested” that 6 to 12 months would be a reasonable period for most advisors to implement any changes it chooses to make.
Contact Registered Advisor Services today for more information on RIA compliance custody to meet your ongoing compliance needs!
