Webinar: SEC Compliance Issues - A Discussion
Presented by ACA Compliance Group
FAQ:
Q: What are some proactive ways to address the biggest issues facing fiduciaries?
Lynne Carreiro (ACA): The biggest thought is that, as a fiduciary, your client’s interest comes first. What the SEC is expecting to see and what we’ve seen with our clients during examination is that you really need to have effectively reviewed your organization to determine where your conflicts of interest might lie. For example, do you have advisors who are also duly registered, who are maybe collecting commissions on securities products. If so, are they recommending those products over other products that might be better for your clients but don’t have as high a commission to the individual representative. Look at other types of arrangements. If there are other conflicts of interest (and mostly it’s going to come in with revenue), look and see where it’s in the best interest of the client and where the best interest of the investment advisor or of the broker diverge, and then make sure that you have controls in place to address those situations when they arise so that you are never taking action that’s detrimental to the client at the benefit of the broker or the investment advisory firm.
Shannon Behara (ACA): I’d also just add that not every potential conflict you’d find would be something that you can implement a control to. You may be able to monitor it but you may not be able to completely eliminate the actual conflict, if it in fact exists. Disclosure is a big part to that. In regular layman’s terms describe the types of conflicts you have; what procedures you have in place to mitigate those conflicts. Then investors and individuals can figure out, “Is what the advisor doing in my best interest?” They can be aware of potential conflicts. “If my advisor recommends an annuity for me, are they also an insurance agent who is going to receive a fee on that. Maybe I want to look a little closer at that recommendation than I might if that person had no financial interest in that product.” Disclosure is the second aspect to really talking about your effects and controls with your clients.
Q: Is it possible to reconcile the conflict of being paid a commission by someone other than the client and not have divided loyalties?
Lynne (ACA): On an individual personal level I think it’s possible to reconcile that conflict, because I think it’s going to depend on the individual integrity of the individuals involved. Like Shannon said, what you need to do is be aware that the conflict exists and be aware that there may be temptation to make a recommendation that, while not necessarily harmful to an investor, may not be in the investor’s best interest. If there’s a situation where an individual may get rich by making one decision over another or a firm may get rich from making one decision over another. It’s just human nature and you get into a philosophy realm over whether or not you’re self-interested, but on the whole, that conflict is going to exist. It is going to be the method of monitoring and also the integrity of the individuals that will resolve the conflict.
Q: Does serving as a trustee of a qualified personal residence trust, such as a trust that holds no securities or cash, constitute custody as defined by the SEC, either under proposed or current definitions?
Shannon (ACA): If it has the ability to hold securities or cash, then generally they would loop that client account in. That being said, you’d have to actually look and see what is held. For example, if it is a trust set up to hold real estate, such as hard real estate or the mortgage for a house, that is not going to be considered a security, and it also would not have cash or funds there. There would be nothing to have custody of in that situation.
Lynne (ACA): And I think this is a good point to mention that a lot of firms typically look at custody as being across the firm. It is a decision that needs to be made on an account by account basis. If you have one account over which you are deemed to have custody, then you are subject to the custody rule in its entirety, with the exception of automatically debiting fees, which is a little different. Shannon’s response in saying you’d have to look to the trust and the trust documents and what it allows is a perfect example of the custody evaluation. It is something you’d need to do on a client by client basis as opposed to looking at something on a firm-wide basis.
Q: If you forward client checks to the custodian is this considered custody?
Lynne (ACA): It’s not necessarily the matter of forwarding them that gives you custody. It’s the matter of, “When you received it, who was it made out to?” If you manage accounts, custodied at Charles Schwab, for example, and a client walks in for a meeting with you and wants to deposit $10,000 to their account; if they sit there and make out the check to Charles Schwab, you can forward that to the custodian all you like. The issue comes in when the check is made out to the advisory firm or to the general partner of a limited partnership. If I receive a check made out to Charles Schwab I can send it to Charles Schwab or I can send it back. No bank will let me deposit that check into my account. But when you receive a check that is made out to the advisor, you could then choose to put it in anyone’s account. That is really the crux of the item. If the check is made out to you, under the current custody rules, you would be required to return it to that client within three business days of receiving it, and I would recommend photocopying the check and sending it certified or registered mail so you have some assurance that the check will actually get back with instructions to the client. That is the way the current custody rule is set up.
Q: Regarding automatic debiting of fees, if the client account is held at a custodial firm other than your own and you only give instructions to the custodial firm to debit the fees, is that considered custody?
Shannon (ACA): That is exactly what we’re talking about here. Yes that would be considered custody.
Q: What can we do to fight the proposed custody rule? How can we get our voice heard?
A: The custody rule is with the commission right now. The best way to make your voice heard is to submit comments during the comment period. For the rule, which was proposed in early May, the initial comment period ended at the end of August and there were several hundred comment letters received, which the SEC definitely does read and react to. That is the best way to have an impact on it. Given the state of the custody proposal, I suspect that there will be a secondary proposal taken into consideration the initial comments. If there is, there will more than likely be a comment period there. Those are the best ways to make recommendations. You can always contact the Office of Investor Education and Assistance. That is a secondary way, but the primary way would be to comment on the proposal itself, which you can do at <sec.gov/rules/proposed.shtml> and submit your comment next to the rule you are looking for.
Q: Do you know what kind of impact this will have on state registered investment advisors?
A: So far I haven’t seen much from NASSA (National Association of State Securities Administrators) on the idea of changing their custody rules. NASSA and the SEC generally follow each other to an extent. NASSA is probably looking at the proposal they’ve put out and thinking of how it might work for their states and members. There may be proposed changes for some states but not others.
When it comes down to it, NASSA can put out recommendations to members of things to consider, but at the end of the day it is a state issue. And right now custody is an area where states differ widely, with some states not necessarily having custody regulations in place, per se. The state registered advisors should really be looking to their state securities division. Some may go this route and some may not. There are definitely some state securities administrators that are more independent than others.
Q: How does this affect family offices? Also how does this affect partnerships we may be involved in where we receive K1?
A: You would still receive a K1. You would still receive the annual audited financial statements either 120 after the fiscal period or 180 days if it’s a fund-to-fund from partnerships that you were invested in. Your look-through to investments that would be partnerships wouldn’t change that much. A family office depends on the ways which you have custody. I’ve seen family offices that only have custody because of direct debit of fees, in which case now the big change would be that you would have to have an accountant do an independent review of those accounts annually on a surprise agenda. That wouldn’t necessarily change if you are a trustee on an account or if you had custody by bill-pay or other ways. The proposed changes with the surprise audit requirement as it stands now would change nearly every investment advisor whether a family office or any other kind of advisor that doesn’t have to get a surprise audit. It would definitely have an impact on anybody that has custody, whether they have to check the box or only direct debit of fees.
Q: How does using ByAllAccounts and having client login credentials relate to the proposed custody rule? There is a distinction in those rules between having qualified plans and brokerage accounts.
A: It depends on what the login credentials give you the ability to do. As we saw in the opening polls, there are different ways that you can gain a read-only view for reporting purposes. It is also important to note that discretionary trading authority does not necessarily lend you custody. If your authority and access to the account is specifically limited to securities transactions, that will not give you custody. However, if the login credentials allow you to log in as if you were the investor and direct the dispersal of assets or to withdraw funds from the account or direct them to another account, then you are running into a custody situation. It really depends on the level of access and what your abilities are once you have that information.
Q: This question concerns a specific company that was bought by a bank. They still operate as a separate entity but some of their accounts are held at the bank. Is the custody rule going to affect them differently?
A: There are two pieces to that. The first is that there are provisions contemplated in the proposal for the affiliation of the custodian with an advisor. They haven’t come out in the proposal and said exactly what that means. It was posed more as a question to the public: should we require that you have your assets with an independent custodian (not affiliated with you or in control capacity)? They also contemplated if additional controls would need to be in place if you are duly registered or owned by your custodian. That aspect, as far as affiliation with the custodian, is kind of up for grabs, and not even fully proposed in the current release. The second piece to that would be if you have your client accounts at a bank regardless of affiliation whether that would change your custody requirements. That depends on how those accounts are set up. If they are individual accounts set up in the name of the investor or client and you’re doing reporting on them as normal and they receive client statements from the bank, then that shouldn’t have much impact change other than the general impact of whether you have custody another way, such as direct debiting or an omnibus account where the new custody would require the annual surprise audit.
Another piece is that the SEC doesn’t have oversight over banks. So if it is a chartered bank, their regulations are going to be overseen by banking regulators. The affiliation may come into play about whether the rule applies depending on whether or not the registered investment advisor is considered an individually identifiable division of the bank. It sounds like this person was an investment advisor first and was bought by the bank, so the ownership is there but they have not been absorbed into the banking department. If they are operating as a identifiably separate division, the SEC may make exceptions for those kinds of advisors as they have done in the past.
Q: If the advisor is going to invoice their clients directly and end up incurring the cost of a surprise audit, do they have to start invoicing their clients directly instead of automatically through the account?
A: That is one of the contemplated ways around it. If you’re an advisor who only has custody because of direct debit, then that may be one of the answers, and the general public may notice that they are receiving invoices from their advisors instead of having the direct debit. It will probably end up hinging on the cost-benefit analysis of the advisor. If you have 10,000 accounts it won’t be feasible, but if you’re a smaller advisor it may be more beneficial to switch to individual invoices.
Q: On that same subject, has anyone done an analysis of the cost vs. benefit to the proposed changes? Is there anything posted in a comment by the SEC?
The proposal itself does have a section where they have to consider the time and cost of implementation. This release asks for more information than it gives in that area. They requested public comment on implementation times and costs on the proposal. I don’t think they are done with that. Statutorily, the SEC is required to make a determination of the time and cost associated with new regulations as well as the paperwork act. There is a paperwork redemption act to determine whether that will reduce paperwork or not. So you can definitely find that in the proposal, but this one is definitely at an early stage. From the SEC standpoint, they’re trying to oversee people with as few as fifteen clients up to potentially hundreds of thousands of clients, so to try to make an accurate cost-benefit analysis, it will be more weighted for cost than benefit for smaller advisors and vice-versa for large advisors. They are looking for the public comments to get a better picture.
Q: Have you seen anybody who has done one?
A: I read a lot of the comment letters, and saw some people refer to it as expensive, and statements by advisors who only direct-debit bill said that it wouldn’t be a reasonable cost to the advisor. I did not see any hard numbers or specific recommendations. I saw relatively little guidance, but the SEC has other methods of evaluating that and they will be required to do that before putting out a final proposal.
Just as a personal experience, two of my clients are required to do surprise audits for omnibus accounting reasons. Even with those similarly sized clients, there is a pretty large difference based on the name of the firm that does your surprise audit and also based on how complicated the investment strategies are and the accounting is. If you are just net trading mutual funds in an omnibus account, that will be a much easier audit to perform than individual securities audits. And if you’re getting into derivative positions that will be more of an expense. I encourage anyone who will incur more costs to write a comment.
Q: What is the best source of information for providing a surprise audit for a firm having custody by virtue of its management of investment partnerships? Where can they find information on how to prepare for a surprise audit or how to find someone to do a surprise audit for them, specifically for an investment partnership?
A: Investment partnerships currently would be required to have an annual audit with audited financial statements under GAP. The Public Company Accounting Oversight Board’s website (<www.pcaocbus.org>) has a list of accounts. If you want more information on how the audits or done, whether surprise or GAP audits, there is a list of general accounting audit procedures. They can be found in the AICPA, which has a guide for the general audit standards that are what is expected to be used for the surprise audits, and the GAP would be on the annual review.
If we are talking about registered investment advisor who is selecting limited partnerships for their individual client accounts, the underlying limited partnerships will all be required to provide audited financial statements to their holders, so you would receive those and then your client accounts would be audited just in the general GAP methodology for separate accounts just like any other clients. They would just rely on the audited financials provided by the underlying investments.
Q: Does the authorization to send distributions to a client’s bank account or address considered custody or is it only if the access can be transferred to other unlike accounts?
A: It really depends on the broker dealer or the custodian. If the investment advisor makes an agreement to only transfer funds to like registrations, but from the custodian’s point of view the investment advisor could transfer the money anywhere, then I think you will end up with a custody issue. If in the account paperwork the client specifically authorizes the custodian to accept instructions for money movement only to like registrations, then the advisor has the ability to move the money but they do not have the ability to access the money at that point. I think it will really come down to whether or not the advisor is prohibited or whether they are just agreeing not to.
The proposed rules don’t particularly change that. You have to look at what access you actually have. Before, I have seen where clients wanted you to be able to transfer between a personal bank account and their securities custodial account and the custodian simply provided a very general authorized money move. Even though the advisor and the client had an agreement that they were only going to move funds from one account to another like registered account and only under “x” circumstances, the authorization actually given to the custodian allowed them to move the funds to any account with or without like registration. You have to pay a lot of attention to what the custodian views as your rights.
Q: I’m wondering with the new fiduciary standards if more advisors are going to be reporting on more assets, because they are going to be required to see the big picture, the whole financial picture of their clients instead of just the piece that they manage.
A: What we’ve been running into a lot with clients is, where they do have these unmanaged assets that they are reporting on, but they don’t actually have control over them, is the real concern with the fact that they don’t have the investment supervisory control over them. There are two schools of thought. One where you are required to be a fiduciary and look at your client’s whole situation, and another where, if I am overseeing these assets and reporting on them, am I incurring a level of responsibility for those assets that I never intended to have? We are seeing probably a fifty/fifty split. Some of my clients have started out divesting themselves from providing reporting on assets that are being managed by other managers or aren’t being managed at all, because they feel that by looking at them and having access they could somehow be interpreted as being responsible for what’s going on in those accounts.
This is true in the 401K accounts. There are many advisors who recommend to the clients what to do with those 401K accounts, but they may not actually have any oversight on them.
And especially with other advisors where, if an advisor is solely doing reporting on that account, and let’s assume that a fraud goes on with the other advisor. Will the main advisor be somehow responsible for the sub-advisor even though it wasn’t a sub-advisory relationship, it was just merely a reporting relationship? Would they be construed to be responsible, since they were getting the statements and doing the reporting, for noticing anything that looked out of whack. It is definitely a double edged sword.
I also have a number of advisors who are specialized niche managers. So certainly a lot of their clients might be institutional, but a number of them are high net-woth individuals who want to diversify and they’ve done it themselves. So what does the advisor out there who specializes in small caps who is not purporting to know everything about your financial situation do? Normally you understand that this is only one part of a diversified package. It will be interesting to see how those small cap advisors fall under that fiduciary theory.
Q: Someone was recently told that direct debiting does not require them to have direct custody. And that the proposal will negate that. Can you confirm that that is correct?
A: Technically under both rules someone who direct debit fees has custody. However, under the current rule, if that is the only way that you have custody, then you don’t have to check the custody box on the ADV and your requirements are fulfilled in much the same way as any other advisor, by having the qualified custodian send the account statements. But the crux of what they are trying to say is, “Before I wasn’t really exposed that much on the custody side.” They are right, though, that in the proposed rule there is no exemption for direct debiting fees. Where we talked about the expanded surprise examinations and making sure that those qualified custodians are sending statements, that would apply to that firm and presumably checking the box yes would also apply.
I think this is a commonly held misconception that you don’t have to check the box and therefore don’t have custody. Please note that checking the box on the ADV and actually having custody are two different things. What the SEC has said is that you don’t have to check the box, but they have not said that you don’t have custody. So just because the box isn’t checked does not mean that you are free of custody.
Q: Regarding the surprise audit, currently and going forward, is the audit just going to focus on those accounts that have custody or is it going to be on the overall business of the advisor?
A: Currently I have seen it done both ways. I have seen auditors audit only those accounts of which they have custody, but that is definitely a minority of the accounting firms that hold that position. Most of the accounting firms have held that if you have custody of even one asset or one dollar of anyone’s account then your entire firm should be under that. The proposed rule doesn’t explicitly state any difference to that or make it any clearer.
I think the issue comes out of the auditor’s standard in that situation, because the rule only requires you to have the accounts audited for which you have custody, but a lot of the auditors, for their own liability, will not do a partial audit of your firm because they feel that unless they look at everything, there is too much of a potential error for them.
SEC Compliance Webinar With Ashland Compliance Partners
Frequently Asked Questions
Here is a transcript of the questions submitted during our live webinar and answers provided by Tim Simons, Managing Partner at Ashland Compliance Group. Additional input provided by Bill Winterberg, CFP® and founder of www.fppad.com
Q: Are you considered as having custody if a client gives the advisor a check to forward to the custodian and the check is made out to the custodian. For example, a client gives you a check made out to Fidelity to forward to Fidelity as an IRA contribution?
A: No, the adopting release states “…the amendments clarify that an adviser’s possession of a check drawn by the client and made payable to a third party is not possession of client funds for purposes of the custody definition.”
Q: If a control person is the trustee of a trust that the RIA firm manages money for can you avoid the annual surprise audit by having the custodian send statements directly to either the beneficiaries or the grantors?
A: Although neither the rule nor the adopting release address this specific question, I think that having the qualified custodian send quarterly statements directly to the beneficiaries and/or the grantor would be acceptable. The adopting release does allow an exception to custody if the trustee was appointed as a result of family or a personal relationship with the grantor and not a result of employment with the adviser.
Q: If a principal of the firm is a GP of a FLP, and all the securities are held at a qualified custodian, to who must the statement be sent by the custodian? The LP’s?
A: If the adviser to a pooled investment vehicle also acts as the GP, the qualified custodian must send the account statements directly to the investors in the pool.
Q: If some of the advisory client’s assets are held at an affiliated trust company, does this define custody?
A: It may, if the adviser or its personnel have access to the client assets through the affiliate. In a no-action letter to Crocker Investment Management Corp (Apr. 14, 1978) the staff opined that the custody decision depended upon: 1) Whether clients’ property in the custody of the affiliated company might be subject, under any reasonably foreseeable circumstances, to the claims of the adviser’s creditors. 2) Whether advisory personnel have the opportunity to misappropriate clients’ property. 3) Whether advisory personnel ever have custody or possession of or direct or indirect access to clients’ property or the power to control the disposition of such property to third parties for the benefit of the advisor or its affiliated persons. 4) Whether advisory personnel and personnel of the affiliated company who have possession or custody of, or control over, or access to, advisory clients’ property are under common supervision. 5) Whether advisory personnel hold any position with the custodian or share premises with the custodian and, if so, whether they have, either directly or indirectly, access to or control over clients’ property.
Q: If an advisor does not have custody, are there any rules around knowing and using account holder user id credentials?
A: No, but the use of account holder user id credentials may be deemed to give the adviser custody.
Q: How do you handle a trade error in a “held away”" accounts when you are logged in as the employee in a 401(k) as an example.
A: If you are the adviser, you correct the error so that the client is made whole.
Q: Any special disclosure language needed since assets are “”held away”" as it relates to best execution?
A: No, the same disclosure used for clients that direct their brokerage is acceptable.
Q: If you can change the address and a notice is sent to the old address that a change was made, does this control mean you do not have custody?
A: No, if you have the ability to change the address of record and transfer assets out of the account, you have custody.
Q: We manage participant 401k accounts and annuity accounts by accessing the accounts over the internet. We cannot move funds in or out of any of these accounts. We cannot take fees only make trades. Our attorney says we have to designate having custody. Is that the case?
A: Doesn’t sound like it, but maybe the attorney knows something about the relationship that is not apparent in your description.
Q: If an advisor has web access to a client’s account and has the ability to change the account’s address but a verification letter is sent to the client when the address is changed, does the client still have custody of client funds?
A: The adviser has custody of the funds if it has the ability to change the address and transfer funds to that new address, whether the client is eventually notified or not. If a verification letter is sent to the client and must be confirmed by the client before the address can be changed, then the adviser does not have custody.
Q: What is the best format to store client credentials to comply with SEC regulations and to demonstrate that controls are in place?
A: Encrypted with limited access.
Q: What if you receive a check in the mail from a client that is made out to the Firm. You send it on to the custodian and the custodian deposits it in the client’s account. (Some custodians (i.e. TDA will do this.) Did the Firm have custody by virtue of the fact that the check was made out to the firm, or is not custody because the check was never deposited into the firm’s account?
A: The firm had inadvertent custody when it accepted the check, rather than sending it back to the client within 3 business days of receipt.
Q: Follow-up to an answer to a previous question: If advisor have access to a client’s login info and can make changes to the account holdings; but, the advisor only makes changes based on client direction. Is this custody?
A: No. If the adviser only has the ability to trade in the account, that’s discretion.
Q: We were audited this year. We did check all of our accounts to see if we could move money etc… We keep ours on a private drive with password protection. The SEC thought what we had was fine.
A: Good.
Q: We currently use ByAllAccounts and obtain login and password for many client accounts (client 401k Plans). What do we need to do to comply with the custody rule? We do not currently receive any statements for all of these accounts and do not know if our clients are receiving statements. Do we need to check each website to verify if a physical address can be changed and only address the ones that can be changed?
A: Yes, you need to check each website. If the client has agreed to accept access to the custodian’s website in lieu of mailed statements, they need not receive mailed statements.
Q: Did I hear correctly that advisors are required by the sec to notify clients of potentially fraudulent activity they uncover if they have account credentials? Total liquidation is easy to spot, but what about other types of fraud?
A: I’m not aware of any such SEC requirement, but if you suspect fraud involving someone not employed by the adviser, you should notify the client and the custodian immediately. If you suspect the fraud is perpetrated by someone within your firm, you should get legal advice immediately.
Q: How are held away accounts treated for: 1) inclusion in portfolio reports; 2) fee billing?
A: They are included and billed.
Q: I was always under the impression that having discretion meant you had a more significant role with the client than if you had custody, since with discretion, you can make investment decisions. You seem to represent that having custody is more significant. Please comment. Thanks.
A: I don’t know about significance, but if the adviser has discretion and custody, it’s a riskier situation for the client than if the adviser just had discretion. If you are the adviser and have custody, you may not only have discretion, but the ability to misappropriate assets. If you have discretion but not custody, it limits your ability to misappropriate assets.
Q: Please clarify. If we do not have the clients logon credentials but they have the ability to change the address of record then I do or do not have custody?
A: If you do not have the client’s logon credentials, and have no other way to access and misappropriate the client’s assets, you do not have custody. If you have any way to access the client’s assets, you probably have custody.
Q: We have read only access to client accounts held away. We cannot place trades or make any changes to the accounts. All trades are implemented by the client. This is how we avoid the custody issue.
A: Exactly.
Q: Please clarify: If you have custody with a qualified custodian providing the client with at least a quarterly statement, is the audit still required?
A: No. If you have physical custody and are not a qualified custodian, or the assets are all with a qualified custodian who does not provide quarterly statements, then the audit is required.
Q: As a reg rep, and an individual RIA, I have trading access to my clients’ brokerage accts. I also have the power to submit address changes. Does that mean I have custody?
A: Not necessarily. If you only have trading access, having the ability to submit a change of address does not give you custody. Having the ability to change the address in the system and have assets sent to that address would give you custody.
Q: Can a client refuse to have copies of statements sent to the SEC?
A: I’m not aware of anyone who has done that, or why they would want to, but I imagine they could. The adviser would not be able to refuse to provide the records (refusal by registered investment adviser to provide required records to the SEC is up to $1,000,000 fine and up to 10 years in jail) without written instructions from the client. It would probably require a letter from the client (or their legal counsel) directly to the SEC, but that action would throw up major red flags to the SEC and could cause other state and federal agencies to become involved.
Q: Debiting fees constitutes Custody?!?!?
A: Yes, from the adopting release”… an adviser authorized to deduct advisory fees or other expenses directly from a client’s account has access to, and therefore has custody of, the client funds and securities in that account. These advisers might not have possession of client assets, but they have the authority to obtain possession.”
Q: I work for a trust company who custodies all our securities at one institution. If we are acting as trustee of a trust and an account has been established in our name in that capacity at another institution, do we have custody of the securities?
A: Yes, an adviser has custody if it acts in any capacity that gives the adviser legal ownership of, or access to, the client funds or securities. Where an adviser acts as trustee for its client’s trust, the investment advisory agreement often takes the form of a trust instrument. These advisers are acting in a capacity that gives them legal ownership of the client assets and thus have custody.
Q: Without having custody, are we allowed to use standing instructions from clients to transfer funds between accounts of unlike registration, call the custodian to issue a check for their taxes or insurance premiums. We get a letter from client authorizing the activity and we contact custodian to tell them when and for what dollar amount to issue checks?
A: Yes, if you only have that ability with written instructions from the client.
Q: If a client gives us standing instructions to pay their insurance premiums every time they are due, but no specific date or dollar amount, just what the invoice says, can we call the custodian and request a check be issued in the amount of the invoice made out to the insurance company without getting a new signature each time from the client without having custody. Or if a client gives us a letter saying they want to be able to transfer funds between their accounts to their son’s account as needed. They call us and tell us when they need it done and tell us how much and we call the custodian and tell them to make the transfer, can we do that based on just the general letter from the client saying they want to be able to transfer funds between those two accounts or do we need a letter each time saying to transfer a specific amount on a specific date if we don’t have custody?
A: It depends on the instructions that have been provided to the custodian. If the client has instructed you and the custodian to make transfers between specified accounts and checks to a specified payee, you don’t have the ability to misappropriate the client’s assets.
Q: If an advisor can change the address of record, however there is a hold on the account and the client is notified of the new address, does this still constitute custody?
A: If a hold on the account means that the adviser cannot have assets transferred to that new address without the client’s approval, it does not constitute custody.
Q: Do you have example ADV language to disclose the arrangement with ByAllAccounts?
A: (Answered by Bill Winterberg, www.fppad.com) Initially, I would recommend that advisers consult with their compliance professionals regarding specific language in Form ADV.
However, in general, advisers should disclose the following main points:
· Clients have the option to permit discretionary authority to the adviser over captive or held-away accounts and assess a management fee on the account.
· Advisers receive account aggregation services from ByAllAccounts in order to obtain price, balance, and transaction information for held-away accounts.
· Advisers may require access to client login credentials in order to configure the ByAllAccounts service to properly download account information into the adviser’s portfolio management system.
· Login credentials are stored in password-protected and encrypted files to restrict access only to authorized individuals in the firm.
The issue of custody mainly depends on whether or not the held-away accounts permit a change to the address of record, so I’m not inclined to mention in issue in the main disclosure bullet points. As a policy, it’s probably best that advisers disclose that they do not have custody of client assets and do not retain client credentials for websites that allow a change to the address of record
