In February 2017, the staff of the Securities and Exchange Commission’s Division of Investment Management issued guidance providing additional clarity on Rule 206(4)-2 under the Investment Advisers Act of 1940:
- Guidance on “inadvertent custody” created by broad authority in custodial agreements – In an IM Guidance Update the staff clariﬁed that broad authority granted to advisers under certain client custodial agreements can create “inadvertent custody” even where the advisory agreement between an adviser and their client provides narrower authority – dealing with the inadvertent custody requires afﬁrmative action by the adviser, client and custodian;
- Guidance on custody created by standing letters of instruction – In a no-action letter the staff clariﬁed that that an adviser may have custody and a corresponding surprise exam requirement when an SLOA or other similar asset transfer authorization arrangement is established by a client with a qualiﬁed custodian unless the adviser meets the conditions in the no-action letter; and
- Guidance on adviser authority to transfer funds or securities between two or more of a client’s accounts – In a modiﬁed FAQ the staff clariﬁed that they do not view an adviser as having custody where it has the limited authority to transfer a client’s assets between the client’s accounts maintained at one or more qualiﬁed custodians subject to certain conditions.
This article was originally published by Chapman and Cutler LLP on February 24, 2017, and was republished in the 2017 second quarter issue of the Journal of Investment Compliance. The republished article is posted with permission.