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.

About The Author

Lance Whittemore has designed, implemented and maintained compliance programs for SEC- and State-registered investment advisors, and has served as CCO for several of them. He has also worked in multiple engagements of varying scope with Registered Investment Advisors, broker-dealers and clearing firms, performing examinations, audits, and remediations of various aspects of their control and supervisory programs.

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