In the unsexy world of compliance, certain buzzwords send us nerdy types into high alert. In the last few years, that word has been “custody.” This is not the mainstream definition of having responsibility or protective care of a family member, a pet or a prisoner. The meaning in the compliance world has more to do with having access to assets and the ability to move assets. As an investment advisory firm registered with the Securities and Exchange Commission (SEC), Altavista complies with heavy regulatory oversight and guidelines in order to prevent any fraudulent activity around our clients’ assets. We do not hold any assets at our firm but utilize institutional brokerage custodians such as Charles Schwab and TD Ameritrade, also heavily regulated but by Financial Industry Regulatory Authority (FINRA), to hold and account for our clients’ supervised holdings. Both the custodian and Altavista are required to track these holdings, report upon them with statements of holdings and activities, and comply with stringent processes to confirm any activity in an account is authorized by the client.
Because Altavista advisors and client service specialists serve as a liaison between our clients and their custodians, we receive requests from clients to have funds or assets moved from a client’s account to another of their accounts or an outside recipient. These are two different kinds of requests. In the brokerage world, moving funds from one of a client’s account to another of their accounts is called a first-party money movement because it is going from one account in the client’s name (or joint name, trust name, etc.) to another of the client’s accounts with the exact same name and social security number. The other type of money movement is when funds are transferred to an outside recipient whether to pay bills, or gift money to a family member or non-profit organization. When funds are transferred to an outside party, this is referred to as a third-party money movement. Either of these types of transfers may be recurring activities and the custodians will recognize a Standing Letter of Authorization (SLOA) with detailed instructions signed by the client to facilitate these requests with certain requirements. SLOAs for first-party money movements are cleaner since the request is specific to accounts both registered in the client’s name. The third-party transfers are the transactions which can trigger custody (defined as access and ability to move assets) if certain steps are not followed.
Over the years, the SEC has amended the Custody Rule (originating in the Investment Advisers Act of 1940) and released additional guidance on how it is enforced. In 2017, the SEC provided additional guidance on how the Custody Rule applies to third-party money movement authority. Without getting too deep in the regulatory weeds, the overall effect of the latest SEC guidance requires much stricter processes around money movement from clients’ accounts. In order to protect our clients’ assets, custodians (Schwab, TD Ameritrade) are verifying written transfer requests by matching signatures on written requests and/or requiring verbal verification from the client. Because we are living in an electronic communication world where emails and mobile phones can be hacked and clients email correspondence impersonated, Altavista will no longer accept an email or a voice mail to begin a third-party movement of money request without calling the client to confirm the request is originated by the client. We realize this may seem redundant, however, we simply want to confirm nothing fraudulent occurs with a client’s account. We appreciate the trust our clients have placed in us and take our responsibility to protect their assets seriously.