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The United States Fifth Circuit Court of Appeal vacated the entire DOL Fiduciary rule in a split decision on March 15, 2018, U.S. Chamber of Commerce v. DOL, No. 17-10238 (5th Cir. 3/15/2018).  Two other circuits have upheld the DOL rule (the Tenth and the District of Columbia Circuits).  This ruling will not become immediately applicable as it is subject to rehearing and appeal to the Supreme Court.  Accordingly, advisers should continue to follow applicable DOL fiduciary rule policies and procedures.  It may be several months before whether we know the impact of this decision.

ADV Filing Deadline is Soon

All federal and state registered investment advisers need to file their 2018 Form ADV Part 1 and 2 by March 31, 2018.  The Form ADV this year incorporates a number of new disclosures.  Two important changes relate to (1) separately managed accounts (Item 5.K); and (2) accounts where the adviser has authority to made fund transfers pursuant to a standing letter of authority (Item 9.B).

Separately Managed Accounts, Item 5.K

Under this revised section, advisers will need to disclose, among other items, the types of assets held, custodial relationships, and depending on the size of the account, the use of derivatives and borrowings in separately managed (SMA) accounts.  The SEC has broadly defined separately managed accounts as all accounts “other than those that are pooled investment vehicles (i.e., registered investment companies, business development companies and pooled investment vehicles that are not registered (including, but not limited to, private funds)).”  For most advisors, this will include all accounts identified in Item 5.F.  Advisers should note that they will also need to complete Item 5.K in Schedule D as well.

The Effect of Standing Letters of Authority

The SEC recently provided additional guidance to advisers who have the power to transfer client funds or securities pursuant to a standing letter of authorization (“SLOA”).  Investment Adviser Association, SEC No Action letter (Feb. 21, 2017).  Under the SEC’s new guidance, these accounts will be deemed within the adviser’s custody.  However, if the adviser complies with the following seven conditions, then the adviser does not need to comply with surprise examination requirement:

  1. The client provides an instruction to the qualified custodian, in writing, that includes the client’s signature, the third party’s name, and either the third party’s address or the third party’s account number at a custodian to which the transfer should be directed.
  2. The client authorizes the investment adviser, in writing to direct transfers to the third party either on a specified schedule or from time to time.
  3. The client’s qualified custodian performs appropriate verification of the instruction, such as a signature review or other method to verify the client’s authorization, and provides a transfer of funds notice to the client promptly after each transfer.
  4. The client has the ability to terminate or change the instruction to the client’s qualified custodian.
  5. The investment adviser has no authority or ability to designate or change the identity of the third party, the address, or any other information about the third party contained in the client’s instruction.
  6. The investment adviser maintains records showing that the third party is not a related party of the investment adviser or located at the same address as the investment adviser.
  7. The client’s qualified custodian sends the client, in writing, an initial notice confirming the instruction and an annual notice reconfirming the instruction.

The SEC Staff indicated assets that meet this qualification should be reported as in custody under Item 9 of Form ADV.

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