The Pennsylvania Department of Banking and Securities (PDOBS) has indicated in recent guidance two concerns related to investment advisers using client credentials to access a custodial account(s). In the letter dated September 25, 2018, PDOBS indicates that the use of client credentials may create custody and is considered to be a dishonest and unethical practice.
First, PDOBS notes the same custody concern addressed by the SEC in Question II.6 of the SEC’s published responses to frequently asked questions. Client credentials that provide an adviser with account access going beyond the ability to trade the account and access information may be custody. The authority to disburse assets or change an address absent applicable custodial controls is custody and requires surprise examination procedures.
Second, PDOBS “considers Registrants using client usernames and/or passwords to access client custodial accounts as a dishonest and unethical practice.” PDOBS indicates that because an adviser’s use of client credentials could invalidate user access agreements with custodians and falsely represents the user that the practice must be discontinued.
To rectify this issue, Pennsylvania-registered advisers are instructed to notify clients to change usernames and client passwords.
We are not aware of other similar conclusions by state regulators. We feel the SEC has tacitly approved the practice through its FAQs but that is surely not a definitive position. This bears watching for all advisers.
For advisers who use client credentials that create custody and plan to have surprise exams of those accounts, another custody problem may arise: custodians may not support delivering to accountants the account statements covering those accounts in which the adviser is not listed in the custodian’s books as a representative of the client. The accountant may be forced to attempt to retrieve statements directly from clients, which can be an arduous path.
While adviser access is a natural function at large retail custodians, other locations of client assets are still evolving to include those functions. Brokers designed to service only internal agents, state 529 plan custodians, and 401k administrators are examples of where advisers’ only choice to access accounts is through the client credentials. As an adviser, consider making inquiries to any custodian or administrator for adviser-specific access to client accounts. We are seeing more professionally managed access opening up, and PA’s position will create an even greater need.
Post written by Keith Marks