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Red Oak Blog

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Sunday, September 3 2017

Standing Letter of Authorization and Avoiding Unintentional Custody

Recently, there has been a focus on RIAs unintentionally obtaining custody of client assets. A few years ago, it became a popular practice of many RIAs to offer clients the ability to add a money movement feature to the client’s investment account. By completing and signing a Standing Letter of Authorization (SLOA), the client could authorize the adviser to perform money movement transfers such as an ACH, journal, and/or wire out of the client’s account on the clients’ behalf. In many instances, the SEC has deemed this to be custody because it provides the RIA access to the client’s funds and securities.

In an SEC no action letter on February 21, 2017, the SEC has provided guidance around SLOAs and custody.

For first-party transfers that involve checks, journals, or an ACH, the RIA can avoid being deemed to have custody by obtaining the clients signature each time a transfer is authorized. For a first-party wire transfer, the RIA can avoid being deemed to have custody, if prior to each transfer, you obtain the client’s signature as well as the destination account number.

When performing a third-party transfer, an RIA can avoid being deemed as having custody by following the 7 guidelines below which were provided by the SEC.

  1. 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.
  2. 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.
  3. 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.
  4. The client has the ability to terminate or change the instruction to the client’s qualified custodian.
  5. 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.
  6. 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.
  7. The client’s qualified custodian sends the client, in writing, an initial notice confirming the instruction and an annual notice reconfirming the instruction.

For more information regarding SLOAs triggering custody, please review the SEC no action letter from February 21, 2017.