Inadvertent
Custody
The SEC
describes taking custody of client assets as an advisor who holds, directly or
indirectly, client funds or securities OR who has the authority to obtain
possession of them. This last part of the definition is how many firms
end up taking inadvertent custody of client assets. If an advisor is ever in a
position to have control of client assets, they have the authority to “obtain
possession of them”, whether that is the advisors intention or not. Mutual
Advisors does not maintain custody of client assets and would face major
regulatory deficiencies if we were forced to claim custody inadvertently. This
list of prohibited activity/actions may cause the firm to inadvertently take
custody of client assets. It includes, but may not be limited to:
·
Possessing client login information. Advisors should
never know a client’s username and password. Even if the intention is just to
help manage outside assets, etc., having that login information gives you the
ability to act as if you were the client, including moving assets. Therefore,
you have control of those assets, or the authority to obtain possession of
them.
o
NOTE: Mutual works with ByAllAccounts and Pontera
(formerly known as FeeX) as solutions for outside assets. ByAllAccounts and
Pontera both feed account information into Orion for reporting purposes.
Additionally, Pontera allows advisors to have trading authority on client
accounts through their system.
·
Accepting security certificates. Physical
security certificates should be mailed directly to the qualified custodian. You
may assist clients with mailing the certificates, but they should never be left
in your possession. This is physically taking control of those shares
controlled by those certificates.
·
Third-Party Standing Letters of Authorization. Standing
instructions to third-party recipients must be monitored to ensure that they
are adhering to the custody requirements. Below are the seven requirements that
firms must meet:
o
Client provides instructions to qualified custodian in
writing that includes the client signature, third-party’s name and
third-party’s receiving instructions;
o
Client authorizes the advisor, in writing, to direct
transfers to the third-party on a scheduled or time to time basis (i.e.
standing instructions)
o
Qualified custodian performs appropriate verification of
instruction through signature review or other methods, and provides prompt
transfer of funds notifications;
o
Client has the ability to terminate the instructions;
o
Advisor has no ability to designate or change the identity
of the third-party;
o
Qualified custodian sends the client, in writing, initial
and annual notice confirming the instructions; AND
o
Advisor maintains records showing the third-party is
not related to the advisor or any of its affiliates.
·
Power-of-Attorney or Trustee. Being listed in
either of those capacities for a non-family member’s account is giving you
control of those assets, or the authority to obtain possession of them.
These are
all common ways in which advisors cause firms to inadvertently take custody of
client assets.
Additional
Information
Additional
information on our policies can be found on the Power Portal Knowledgebase.
If you
have questions about this guidance or any particular scenario, please reach out to Compliance to schedule time with us.
Thank
you,
The
Mutual Compliance Team
