In an effort to provide premium service to clients, it’s common for financial advisors to be granted a standing letter of authorization – or “SLOA” – to enact money movements in and out of a client’s account. The use of SLOAs and other disbursement authorizations effectively allows advisors to act based on a client’s verbal requests, without “troubling” them for additional paperwork and signatures every time.
Yet the caveat is that while providing such conveniences is appealing from a client service perspective, from a regulatory perspective, the ability of an advisor to transfer money out of a client’s account – especially to a third party that isn’t the client – creates the risk that the advisor could abuse their authority. Accordingly, in this “age of Madoff”, the SEC has decided it’s necessary to issue additional compliance rules to protect consumers when it comes to advisors with standing letters of authorization (SLOAs) to make client disbursements.
In this guest post, Chris Stanley, a compliance consultant and the founding principal of Beach Street Legal, shares his perspective on the recent issuance of an SEC No-Action Letter, and supporting FAQ and IM Guidance Update 2017-01, which deems that advisors who have SLOA authority will be treated as having custody of client assets. Which means not only will those assets and accounts need to be reported for custody purposes on Form ADV, but those investment advisers who don’t comply with certain new safe harbor provisions will also be subjected to the requirement for an annual surprise exam under the custody rule as well!
Fortunately, the SEC will allow RIAs to continue to use SLOAs to support clients in limited (but still useful) circumstances, and provide additional guidance on how RIAs can avoid the custody rule if their only standing authorizations are for “first-party” transfers (i.e., moving money amongst accounts that are all the client’s, with the same account registration). Nonetheless, the reality is that most advisors will at least need to work with their RIA custodian to update account agreements and/or some of their SLOA paperwork with clients to remain compliant and avoid surprise exams under the custody rule!