SEC’s Custody Rule and Impact on Money Transfers

In a continued effort to protect clients, the Securities and Exchange Commission (SEC) modified its Custody Rule requirement for Investment Advisors as it relates to transfers from one account to another. Custody is defined in this rule as “holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them.” The following examples explain how this will affect how we process transfers for our clients going forward.

Standing authorization to initiate transfers to and from accounts with the exact same owners (otherwise known as a first-party transfer) would not be considered custody. For example, WJ Interests having standing authorization to transfer funds from Jane Doe’s IRA to Jane Doe’s Individual Taxable account would be a first-party transfer authority and WJ Interests would not be considered to have custody of Jane Doe’s assets. Another example of a first-party transfer would be John and Jane Doe’s Taxable account at Schwab to John and Jane Doe’s checking account at XYZ bank since the account owners are the exact same people.

However, standing authority to initiate transfers to and from accounts with different owners (otherwise known as a third-party transfer) would be considered custody. For example, having standing authorization to transfer funds from Jane Doe’s IRA to John and Jane Doe’s taxable account would be a third-party transfer since the account owners are not the exact same owners. In this case, WJ Interests would be considered to have custody of these assets if given standing authorization to transfer funds from and to those accounts. Another example of a third-party transfer would be John Doe’s Irrevocable Trust account to the beneficiary’s individual taxable account. In this case, the owners of the account are different entities/individuals and would be considered a third-party transfer.

Therefore, we have slightly modified our money movement transfer procedures in order to comply with the SEC rule and ensure continued protection of your assets. Any standing authorizations to move money from and to accounts with the exact same owners (first-party transfers) will remain in place. However, any standing authorizations to initiate a transfer of funds from and to accounts with different owners (third-party transfers) will no longer be valid and will need to be initiated by a signed authorization for each transaction. Recurring transfers (i.e. transfers already setup to occur on a periodic basis like monthly or quarterly) to third-party accounts will not be affected by this since that authorization has already been given directly to the custodian (e.g., Schwab).

As a reminder, clients are also able to initiate transfers on their own via the Schwab online login. However, before initiating any transfers, we will just need to know how much cash you will need to be made available in advance (usually 3 business days) so that we can place the appropriate trades in order to generate the amount of cash needed. If you need assistance in setting up the online transfer ability, please give us a call and we would be happy to walk you through the steps. Otherwise, we can always initiate the transfers for you with your written instruction. Also, please reach out to us if you have any questions or concerns as to how this may impact any future transfers for your specific accounts.

Although this new modification to the rule places a slight burden on our clients, we do believe it is in the best interest of clients and the protection of your assets. As always, we appreciate the confidence you have placed in us to help you reach your financial goals and objectives.