New Remedy Coming for SEC’s Custody Rule?

The SEC’s Custody Rule continues to be a common source of confusion and a landmine for noncompliance. Custodial paperwork has caused huge headaches for investment advisers, who are not a party to the agreement and may not even have a copy of the custodial new account paperwork. The issue with existing guidance is that it really doesn’t provide any good suggestion for how to resolve the matter. The Securities and Exchange Commission (SEC) has repeatedly indicated that getting clients and custodians to sign a letter has been their interpretation since 2003.

The Investment Adviser Association has had several meetings with the SEC to discuss this issue in hopes of finding another remedy, IAA Assistant General Counsel Laura Grossman said in a panel discussion with Charles Schwab & Co.’s Kimberly Davis and Ascendant’s Jackie Hallihan during Ascendant’s recent compliance conference. Many custodians do not want to sign the letters suggested by the SEC because they are fearful of any additional liability this may cause.

Grossman indicated during the panel that the SEC may have proposed a solution. It would like to see the following:

  • The adviser sends one letter to the custodian stating, “We do not know if we have custody based on paperwork, but we don’t need it and will not act on it.” The letter doesn’t need to be signed by the Custodian; thus, it’s a one-way letter.

The adviser could also send a letter to the client stating that they don’t know if there is custody due to custodial paperwork but that they will not act on it. (The SEC hasn’t yet indicated whether this letter would need to be signed). Additionally, the SEC wants to see strong controls in place to ensure no distributions can be made.

It therefore may come down to notice plus controls: notice to the custodians and the internal controls to ensure protection of client assets.

The IAA hopes to get the SEC to opine on this as soon as possible since it will impact the ADV filings coming up for AUA filings.


Subscribe to CSS Blog

CSS frequently publishes blog posts which are written by our team from their observations in the field, at conferences and through experiences with compliance professionals. These posts are designed to further knowledge and share industry best practices. Topics run the gamut, including Form ADV, cybersecurity, MiFID II, position limit monitoring, technology challenges and more. Complete and submit the brief form below to receive notifications when we publish new content.

Loading form...

Latest Content

Tips to Prevent an SEC OCIE Investment Adviser Exam from Going Bad

Strategies to employ when an SEC OCIE adviser exam goes bad drew a great crowd at the recent CSS Ascendant Fall Compliance Conference. Proactively pointing an exam in the right direction was a consistent theme, summarized by the familiar refrain: “There is no substitute for preparation.” A few keys to note if you find your … Continued

Giving Voice to Values: A New Approach to Ethics

The “Giving Voice to Values” program grew out of Professor Mary Gentile’s frustration of what was going on in both the financial industry and in higher education. She was frustrated and angry about the poor way that ethics was being taught in universities and applied in real-world scenarios. What developed out of her frustration is … Continued

Tips for Developing a Tailored Private Fund Compliance Calendar

As regulatory concerns proliferate and become more complex, developing and monitoring your “to-do” list becomes of paramount importance.  John Gentile, the Director of Private Fund Manager Services for Compliance Solutions Strategies and Michael Emanuel, a Partner at Stroock & Stroock & Lavan LLP provided attendees of the recent CSS 2019 Fall Conference some insight into … Continued