Standing Letters of Authorization (SLOA) Clarity Provided

The SEC’s Position on Standing Letters of Authorization (SLOA) and Custody

Standing Letters of Authorization (SLOAs) 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 from February 2017, the Securities and Exchange Commission (SEC) states this practice is, in fact, custody.

An investment adviser with power to dispose of client funds or securities for any purpose other than authorized trading has access to the client’s assets.  We believe that a letter of instruction or other similar asset transfer authorization arrangement established by a client with a qualified custodian would constitute an arrangement under which an investment adviser is authorized to withdraw client funds or securities maintained with a qualified custodian upon its instruction to the qualified custodian.  An investment adviser that enters into such an arrangement with its client would therefore have custody of client assets and would be required to comply with the Custody Rule. 

No Enforcement Recommendation for Omission of Surprise Audit

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 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.

RIA Custody Rule Compliance Support

Oyster Consulting’s regulatory compliance experts have the experience and perspective registered investment advisors need to comply with the SEC’s custody requirements. From Books and Records to Form ADV disclosures, our consultants ensure that your compliance program will meet regulatory expectations.