Custody Rule Requirements for RIAs
Written by: Brian Young
There has been a level of uncertainty for Registered Investment Advisors (“RIA”) over the past year in regards to the SEC’s position on Rule 206(4)-2 (“Custody Rule”) (see the AdvisorAssist blog post on Custody for additional information) and how it applies to standing letters of authorization (“SLOA”) for a client at a qualified custodian (“Custodian”). It has been a common business practice for RIAs and clients to establish a SLOA at the Custodian which authorizes the RIA to instruct the Custodian to disburse client funds to a third party account or payee. Generally speaking, the intent of this practice is to minimize the administrative steps for RIAs to service the money movement requests of their clients. However, there has been much confusion by both RIAs and examiners as to which SLOA scenarios constitute custody of client funds and trigger the Custody Rule requirements for the RIA.
On February 21, 2017, the SEC provided clarity to this question through a no-action letter. The SEC confirmed their stance that the business practice of using SLOAs as instructions for payments to third parties fall under the definition of custody. Thereby requiring RIAs to disclose that they have custody of client funds. However, the SEC also provided some relief for RIAs as it relates to the independent surprise examination requirement of the Custody Rule.
The SEC advised that they would not seek enforcement action against RIAs who do not obtain a surprise examination as long as the RIA follow the below guidelines:
- The client provides an instruction to the 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 RIA, in writing, either on the 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 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 Custodian.
- The RIA 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 RIA maintains records showing that the third party is not a related party of the RIA or located at the same address as the RIA.
- The client’s Custodian sends the client, in writing, an initial notice confirming the instruction and an annual notice reconfirming the instruction.
CCO Best Practices
To ensure that you are properly dealing with custody issues AdvisorAssist recommends the best practices of:
- Perform an assessment to determine whether or not you have custody of client assets or securities
- Review all current SLOA to identify any that are established to send funds to an account at a different Custodian or to a third party payee.
RIAs have until October 1, 2017 to comply with the above described actions. Also, there will be a new requirement for RIAs to state client assets that are subject to a SLOA on their ADV1, Item 9.
How to Introduce and Position Yourself the Right Way
Introducing yourself – more to getting it right than you think!
What do you say when someone asks you “so what do you do?”
You might say, “I’m a financial advisor”. Or “I’m an investment advisor”. If you’re a top advisor, you might be compelled to say “I’m Vice President and Portfolio Manager”. Or even “I’m a CFA”.
Well put all of those away if you’re introducing yourself to a woman you might want as a client. None of the above will impress her – she might even “run for the door” thinking you’re going to try to “sell” her something.
Your goal is have her say “tell me more about that”.
So what do you say?
Here are 4 quick tips:
- Make it about your clients
- Make it about outcomes
- Make it interesting
- Make it fun
How about something like this: “I help people have their cake and eat it too”. Doesn’t that beg the question “what does that mean” or “how do you do that”.
Okay maybe that’s a bit over the edge but it’s important you make it about the people you help and not about what you do to help people get there.
I help <type of people you serve”> <achieve this>. Something like:
- I help retirees create a sustainable income.
- I help women understand money on their terms.
- I help young couples get a good start towards financial security.
Now you try it! Send us your best one.
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