Friday, September 30, 2016

Custody Alert - Linked Accounts

Recently, SEC staff has raised questions during exams regarding the authority granted to Registered Investment Advisors ("Advisors") to transfer funds or securities between customer accounts with the same or a different qualified custodian. Examiners have noted that having authority to transfer funds or securities between same registered accounts without the actual account numbers and receiving account information included in the authorization on file with the custodian may be deemed custody.

Since May 20, 2010, the SEC has stated in Question II.4, that the limited authority to transfer a client's assets between the client's accounts maintained at one or more qualified custodians is not custody, if 1) the client has authorized the Advisor in writing to make such transfers and 2) a copy of that authorization is provided to the qualified custodians, specifying the client accounts maintained with qualified custodians.

We, at AdvisorAssist, maintain that if such authorization is granted, via the client signed custodial account application form, then it should reasonably satisfy these two elements required by the SEC. Advisors may want to keep a copy of such custodial application forms submitted by their clients to demonstrate these elements are satisfied upon request by a regulator.

To avoid this deficiency at your firm AdvisorAssist recommends the following best practices:

  • Reviewing your client custodial account forms to understand what custody implications they can create on your firm.
  • To avoid custody, ALWAYS get written instructions from the client and validate both accounts for custody, cybersecurity, fraud, etc.
  • If a recurring movement, review the instruction and accounts initially and then review through periodic sampling.
  • An Advisor should never initiate a transfer without having documentation of the authorization to make such instructions in your books and records.
  • Maintain the transfer documentation in your books and records for the typical books and records duration, five fiscal years at the end of the year the instruction was made.

Contributors:
Brendan Furey
Michael Conlon