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Bob Veres E-Column: Tales of Regulatory Over-reach

Lately, I’ve been hearing all sorts of stories, anecdotally, about advisory firms having problems with regulatory examinations in ways that don’t make sense. 

One case in point: the state regulators in the states of Washington and Vermont have strongly advised state-registered advisors not to charge retainer fees for their services, saying that they prefer the AUM model because, well…  Actually, it seems that they’re opposed to retainers because they don’t understand them.  So they effectively prohibit the professionals in their state from moving to a less conflicted model.

Meanwhile, the SEC seems to be enforcing new rules that it made up internally, that have nothing to do with the actual laws—and the visiting examiners are threatening advisory firms if they don’t comply with these extra-legal requirements.

And most alarmingly, I’ve heard from a number of wealth management firms who were told they had custody of client assets due, not to the fact that they can actually touch the money, but because of a clause in the Schwab Advisor Services custodial agreement which reads as follows:

Trading and Disbursement Authorization. By checking the circle and signing this Application, I authorize Schwab (1) to execute trades in my account at the direction of IA as provided under the Trading Authorization heading in the attached Schwab One® Account Application Agreement; (2) to disburse assets for investment purposes or to me personally, as instructed by IA; (3) to remit checks, wire funds and make certain disbursement of funds held in the account as regulations permit (i) to banks, broker-dealers, investment companies or other financial institutions for credit to an account of identical registration, or (ii) to me at my address of record.  This disbursement authorization does not apply to Schwab MoneyLink® distributions or direct, ongoing electronic payments of dividends, interest and money market income.  I acknowledge and agree that Schwab cannot confirm the account registration at the receiving financial institution and will rely solely on the representations of my IA as to the identical registration of the receiving accounts. (Note: This option is not available for Estate, Guardianship or Conservatorship accounts in the name of the aforementioned account types.)  (emphasis added)

Basically, that clause tells your client that your RIA firm has the authority to have money wired to a third-party account, and the client – not the custodian – is responsible for checking to make sure the RIA firm is sending the money to the right place.  It contractually gets the custodian off the hook if anything happens to the money, and puts the advisor in a position that the SEC deems to be custodial.

And that’s not all.  The SEC has lately taken the position, with some advisory firms, that if you have account aggregation software built into your asset management technology stack, you have custody over those held-away assets—and therefore have to get that independent audit. 

Why?  Because the account aggregation software uses client passwords to pull performance data, and therefore theoretically you could go in and make a disbursement.

There are two things I’d like to do here.

1) Collect stories about SEC or state inspections where things went awry or there were findings that you strongly disagree with, where something occurred that was unfair or outside of the boundaries of actually protecting the public.  (We will, of course, keep all names private to prevent any chance of retribution.) 

Please send me any stories you might have about recent examinations that other advisors should know about, and especially those that we should be outraged over.  What should others be watching out for?

2) Collect names of professionals who would be willing to serve on an informal committee that would review the custodial contracts looking for problematic language.  There appears to be a trend with some custodians toward offloading their responsibility and liability onto advisors.  Perhaps we can create a check and balance that speaks on behalf of the profession.

If we can get a dozen or so thoughtful chief compliance officers on this committee, looking for contract language, then the profession as a whole could push back on these clauses slyly inserted by custodial attorneys.  Skeptical?  One firm, Gibson Capital Management in Wexford, PA, has successfully pushed back on language in Fidelity custodial agreements.  The custodians are more sensitive to pressure from their affiliated advisory firms that you probably realize.

So if you (or your firm’s CCO) are willing to serve on this committee, please send me contact information when you can.  (We already have someone who has volunteered to lead and chair the committee: Brenda Gibson, of Gibson Capital Management.)

And if you and your firm have been through an SEC or state audit that produced an outcome that makes no regulatory sense, please give me the story so I can collect and publish them for the full community.

You can send your stories to:

Thanks, as always, for your participation in these efforts to bring light to the darker corners of the profession.


Bob Veres
Inside Information

Insider’s Forum conference – September 6-8, Nashville, TN