Custody Challenges for Loan Trading

The LSTA was pleased to present:


The staff of the Securities and Exchange Commission has recently taken the position that registered investment advisers that trade loans and other assets, such as derivatives, that do not settle “delivery versus payment” (“DVP”), have custody of client assets under the Investment Advisers Act and therefore must comply with the requirements of the custody rule. While the Adviser’s Act custody rules do not apply to trades on behalf of CLOs or mutual funds, they do apply to trades on behalf of separately managed accounts or co-mingled accounts. The SEC’s attribution of custody to these assets would require registered advisers to engage auditors to conduct annual surprise audits. The LSTA has been engaged with the SEC staff in an attempt to persuade them that (i) the exercise of trading authority in the ordinary course of managing an advisory account should not be considered “custody,” and (ii) even if they do not change that view, surprise audits are unnecessary in the loan trading context because of all of the protections already built into the system.

The LSTA hosted a webinar on Tuesday, July 11th at 4PM to discuss (i) background on the custody rule; (ii) the SEC’s position vis a vis loans and other assets that do not settle DVP; (iii) the implications of that position; (iv) what the LSTA and others have been doing to date; (v) next steps; and (vi) how registered advisers should be thinking about this issue.

Members joined use for an expert discussion on the following topics:

  • What is “Custody?”
  • The SEC’s view that loan trading results in custody of customer assets
  • The implications of the SEC’s view
  • What is the LSTA doing?
  • Next steps
  • What should registered advisers be doing?

Amy Doberman, Partner, WilmerHale
Elliot Ganz, General Counsel, LSTA


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