In a recent Risk Alert, the staff of the Office of Compliance Examinations and Inspections (“OCIE”) of the Securities and Exchange Commission (“SEC”) observed that one of the most frequent deficiencies identified in OCIE examinations was the failure of investment advisers to recognize that they might be deemed to have custody of client assets for purposes of Rule 206(4)-2
(“Custody Rule”) under the Investment Advisers Act of 1940 (“Advisers Act”). On February 21, the staff of the SEC’s Division of Investment Management provided additional guidance under the Custody Rule that addressed three situations where there have been significant questions as to whether an investment adviser has custody of client assets:
- when the adviser has limited authority to transfer client assets pursuant to a standing letter of instruction or other similar asset transfer authorization arrangement (“SLOA”) established by a client with a qualified custodian;
- when an agreement between the client and its custodian appears to provide the adviser with access to client assets—even if the investment adviser is not a party to such agreement; and
- when the adviser has the authority to move money between the client’s own accounts (“first-person transfers”).
Additional contributor to this post:
Gregory T. Larkin, email@example.com