In the No-action letter, the SEC clarifies that the Commission believes that a letter of instruction or other similar asset transfer authorization arrangement established by a client and submitted by an investment adviser to the qualified custodian would constitute an arrangement under which an investment adviser is authorized to withdraw client funds or securities maintained with a qualified custodian. Based on the recent no-action letter, upon instruction by the investment adviser to the qualified custodian, the adviser is deemed to have custody and, as a result, is subject to a surprise custody examination.
The Division of Investment Management noted, however, that it would not recommend enforcement action to the Commission under Section 206(4) of, and Rule 206(4)-2 under, the Advisers Act against an investment adviser if that adviser does not obtain a surprise examination where it acts pursuant to such an arrangement under the following circumstances:
- 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.
- 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.
- 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.
- The client has the ability to terminate or change the instruction to the client’s qualified custodian.
- 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.
- 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.
- The client’s qualified custodian sends the client, in writing, an initial notice confirming the instruction and an annual notice reconfirming the instruction.
In addition, beginning with the next annual updating amendment after October 1, 2017, an investment adviser should include client assets that are subject to a letter of instruction or other similar asset transfer authorization that results in custody, including instances following the above relief, in its response to Item 9 of Form ADV.
SEC No-Action Letter ›