New SEC 'no-action' letter related to 'third-party' money movement released; new guidance related to 'first-party' money movement also issued

On February 21, the Securities and Exchange Commission (SEC) issued a much anticipated 'no-action' letter providing guidance to advisors and custodians related to the Custody Rule—a rule which was designed to provide meaningful investor protections, but often caused confusion and uncertainty in the industry. This new guidance comes after a number of lengthy discussions Schwab, the Investment Adviser Association (IAA) and other custodians have had with the SEC seeking deeper clarity on the rule and advocating for the removal of a costly regulatory burden for Registered Investment Advisors (RIAs).

Positive outcome for 'third-party' money movement
As we expected and shared with advisors in our November 2016 Regulatory Update webcast and other recent communications, we are pleased to see that today's guidance reflects the success of our advocacy efforts and outlines a set of conditions that, when followed, allow RIAs to avoid the need for the annual surprise examination requirement of the Custody Rule. The guidance also confirms that SLOAs granting 'third-party' money movement authority do constitute custody.

As a reminder, Schwab has already updated the majority of our processes to help advisors comply with these requirements and we began implementation in January 2017. The one exception is the MoneyLink® process, which we are currently updating. Once complete, advisors who use MoneyLink® for 'third-party' money movement will be able to comply with the same set of conditions that apply to traditional SLOAs. We will let you know once those updates are completed.

SEC indicates stricter interpretation of 'first-party' money movement
While the 'no-action' letter did not address the ongoing authority which allows an advisor to move money between a client's own accounts at different financial institutions ('first-party' money movement) the SEC did provide guidance on this topic in revised FAQ II.4

To date, most in the industry have generally not considered 'first-party' money movement to be custody because the money never leaves the client's possession and control. However, the SEC clarified that they have a stricter interpretation of the rule. They made it clear that in order for an advisor to avoid triggering custody and the annual surprise examination requirement, their client must provide the sending custodian a signed authorization form listing the receiving account number(s) at other outside financial institutions. This holds true regardless of whether or not the advisor acts upon the authority, if granted.

SEC recognizes need for transition period
Given this new guidance, custodians and advisors will likely need to make some changes to their processes and procedures to allow proper compliance with the rule. Schwab has already begun the necessary work in order to help advisors serve their client's needs while making it simple for advisors to comply with the new guidance.

While the SEC did not specify a deadline by which advisors and custodians need to make any necessary changes, they do understand that it will require a "reasonable period of time" to implement new processes and procedures, perhaps 6-12 months. In discussions with SEC staff, they acknowledged some firms and custodians may need longer based upon their own facts and circumstances. Given this, the SEC expects advisors to make a good faith effort to comply with these requirements with the understanding that the SEC staff views implementation timing with some flexibility.

Schwab has already started work
We have already begun making the necessary changes to our forms and systems that will help you meet these requirements and provide you with options, allowing you to choose how—and if—you want to manage 'first-party' wires. We hope to complete the necessary work to our systems and processes by the fall of 2017. At that time, your clients will be able to grant you the following choice of authorizations when it comes to 'first-party' money movement:

  1. Trading and disbursement authorization for checks and journals only
  2. Trading and disbursement standing authorization for checks, journals and wires where no destination account number(s) are supplied in advance
  3. Standing 'first-party' wire authorization where destination account number(s) and new signatures are obtained in advance

We have developed some FAQs to provide you with additional information on this new SEC guidance and to help you understand how it may impact you and your firm.

Our goal is to provide the best possible experience for you and your clients. We will be reaching back out to you very soon with more details and timing regarding the changes we are making and the options that will be available to you.