Standing Letters of Authorization Clarity Provided

 

Standing Letters of Authorization (SLOA) that Registered Investment Advisers use to provide services for their clients have been surrounded by uncertainty.  Does this practice constitute custody of client assets?  In a No-Action Letter dated Feb. 21, the SEC states this practice is, in fact, custody; however, the Division of Investment Management will NOT recommend enforcement for not having a surprise audit if the following conditions are met:

  • 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 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.
  • 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 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.
  • 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.
  • 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 also stated that beginning with the next annual updating amendment after October 1, 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.

Our consultants are experts in these areas and have the experience and perspective gained from working with hundreds of clients to help you efficiently and effectively run your firm. They have sat in your seat and faced the same obstacles and regulatory scrutiny. We can also provide you with compliance automation through our Oyster Solutions platform by integrating risk assessments, policies and procedures and testing programs that are aligned to how you do business.

More about Lance Whittemore: As a Senior Consultant at Oyster, Lance has designed, implemented and maintained compliance programs for SEC- and State-registered investment advisors, and has served as CCO. He also works with broker-dealers and clearing firms, performing examinations, designing and testing controls, and responding to regulatory matters. Lance has over 20 years’ experience in financial services.  You can reach him at (804) 521-6016.  If you have further questions or concerns about this topic, please complete our contact form and one of our Relationship Managers will be happy to assist you.

 

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