More On Legal & Compliancefrom The Advisor's Professional Library
- Registration Requirements for Investment Advisor Representatives (IARs) When individuals launch an advisory firm, they must avoid marketing themselves or the firm as investment advisors before they are properly approved and registered. Otherwise, they are subject to severe penalties.
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
Charles Schwab Advisor Services announced late Tuesday that following the receipt of a no-action letter from the SEC in February, it is endorsing DTCC’s Alternative Investment Products service to facilitate the custody of alternative investments for advisors.
“We know advisors are increasingly using these alternatives,” said Schwab Executive VP Bernie Clark in an interview Wednesday, “but more will use them; having DTCC step into this void will greatly accelerate” both the custody of alternatives and, perhaps, advisors’ embrace of alternative investments.
As Clark, who heads SAS, explains it, the no-action letter “brings some closure to a long process” that he said began in 2008, when “we recognized this asset class was growing in importance and in complexity," and DTCC was already working on a pilot program for alternatives custody, modeled on Fund/Serve, its mutual fund settlement service. Since DTCC was “going down the same path, we spent the last two-plus years to get the SEC to give a no-action letter” that would clear AIP for being the platform that would comply with a broker’s possession and control requirements.
DTCC, Clark said, as an expert in settlement procedures was already building the technology, but with the no-action letter, “the solution has now been empowered.”
The benefit to advisors who have clients in alternative investments is clear. Adam Langley (right), chief compliance officer at Aspen Partners, an RIA and a commodity pool operator, said in an interview Wednesday that “at least for us,” the Schwab announcement and the no-action letter “will be hugely important.” He noted that from an administrative standpoint, there are “lots of challenges on holding alternative investments” in a client’s portfolio, mentioning as well that “when someone wants to invest in some type of alternative investment, like a commodity pool or a hedge fund of funds, you’d be amazed at how archaic the process is.”
For example, he says that even though it’s only March 7, Aspen is already working on the paperwork for clients who want to make an investment in various alternatives by April 1. Since many hedge funds, for instance, only accept investments once a month, often on the first of the month, it takes weeks to complete the nearly all-manual process of an investor filling out a subscription document and the money manager receiving and accepting that document before a wire transfer of the funds can happen. Moreover, pricing and valuation of the investment has to be done every month by custodians like Schwab, again manually, since alternative pricing doesn’t rely on a publicly available NAV.
“AIP will automate” that process instead, suggests Langley, and all parties will be “speaking the same language” and transmitting data through AIP to the custodians, significantly decreasing the processing time for new investments, but also reducing errors. “It will provide everybody with more flexibility,” he said, making the process “faster and more accurate than ever before; it will benefit the fund sponsors, the custodians, and the investors,” not to mention advisors.
Clark said that, so far, some 100 alternatives sponsors are either members of AIP or in the membership pipeline. There is no membership charge for sponsors, according to the DTCC; fees for the sponsor are based on trading volume. Clark says that “AIP two years ago was a lesser-known concept–it didn’t have the empowerment of the no-action letter to make it more meaningful.” Langley agrees, saying that “with the SEC saying it’s OK, and with Schwab behind it,” it’s likely AIP will be embraced more by alternatives sponsors.
As for Schwab’s role, Clark said the company was pleased to “have been the cheerleader here,” and pointed out that AIP would “work for all custodians” now that the SEC has said AIP will be an acceptable control location. He estimated that the agreement “would benefit about a third of our clients” who have allocated at least some end client assets to alternatives.
Over a year ago, Clark said, Schwab hired Mike Wood, director of alternative investments, whose job it is to create awareness of the platform; Wood will continue to educate both advisors and encourage sponsors to become AIP members. “In reality, if you think about any asset class,” said Clark, “this is how it should evolve from manual processes,” and that DTCC has now “systematized” the process to everyone’s benefit.