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Loan Trading for SMAs: Do Advisers Have Custody?

June 28, 2017 - The staff of the Securities and Exchange Commission has recently taken the position that registered investment advisers that trade loans and other assets (including 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 comingled accounts.  The SEC's attribution of custody to these assets would require registered advisers to hire 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 is hosting a webinar on Tuesday, July 11th at 4 p.m. 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. 

The webinar will feature Amy Doberman, a partner at WilmerHale who has been assisting the LSTA on this matter, and Elliot Ganz, the LSTA's General Counsel. Click here to register for the webinar.

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