Pennsylvania Sounds Warning Bell Over Client Credentials and Custody

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

Related Content

Latest Content

Regulation Best Interest, Cybersecurity Top Concerns at IAA 2019 Compliance Conference

The Investment Adviser Association (IAA) represents the interests of investment advisers in Washington D.C., and the IAA Investment Adviser Compliance Conference 2019 was a forum for the discussion of future potential rulemaking. Cybersecurity and Fiduciary Rule considerations were headline topics, with custody and marketing right behind. The following is a summary of key issues discussed … Continued

The Challenges of Building a Global Compliance Program

Compliance programs face challenges in balancing global requirements with local exceptions while incorporating the fast pace of regulatory change, addressing critical business needs and obtaining the necessary resources necessary to manage the program. Trends and thinking on the subject were center stage at the recent CSS London event “Looking at the Year Ahead – Global … Continued

Coming to America – California Adopts GDPR-Like Privacy Regulation

After a number of firms struggled last year to get their marketing and information systems into compliance with the EU’s General Data Protection Regulation (GDPR), advisers to U.S. clients will soon be facing similar requirements on the home front.  On the heels of the Cambridge Analytica scandal, California enacted the California Consumer Privacy Act of … Continued

SEC and FINRA 2019 Examination Priorities

The SEC and FINRA have recently released their examination priorities for 2019. These releases provide insight into regulatory priorities and serve as guidance for a firm in evaluating its compliance program. We will discuss topics covered in these releases, including: Protecting retail investors Fees and expenses Disclosure Conflicts of interest Suitability Protecting senior investors Trading … Continued

SEC Reopened After 35-Day Government Shutdown

SEC Chairman Jay Clayton announced on Saturday, January 26 that with an agreement reached to end the government shutdown, the “Commission has resumed normal staffing levels and is returning to normal operations.” In total, about 94% of the commission’s approximately 4,400 employees had been furloughed during the 35-day shutdown, according to its operations plan. In a … Continued

Mailing List

Subscribe to the Ascendant Compliance email list for the latest compliance resources, conferences, ComplianceCasts™, and more.

Loading form...

Contact Us

Ascendant works together with clients to identify and assess critical needs through customized plans. If you need assistance with compliance functions, regulatory services, cybersecurity or technology tools, we’d love to speak with you.