Schwab back pedals on alternatives ban

Mar 12, 2009 @ 12:15 pm

By Jed Horowitz

The Charles Schwab Corp., under fire from some investment advisers for abruptly ending custody of most alternative assets, said it is modifying the policy but not abandoning it.

After talking to advisers since the policy was announced less than three weeks ago, the San Francisco-based company will not impose the ban it planned to impose May 1 for accepting new hedge fund, real estate and other alternative investments.

It said it will initiate the ban once it establishes a long-term servicing relationship with a third-party custodian, which it hopes to do by yearend.

“Our general approach remains intact,” a Schwab spokeswoman wrote in an e-mailed statement, “but because we understand that market demands are placing unprecedented pressure on advisers and we want to be as flexible as possible, we are creating an interim process.”

However, Schwab has not modified the decision to end custody of funds or other alternative assets managed offshore. It is continuing to accept investments in a limited number of hedge funds, futures funds and other investments that it is paid to market over its AI Source and AI Assets platforms.

Schwab has said that it imposed the new policy out of concern about potential regulations that could make custodians and other gatekeepers more liable for fraud and other securities law violations following scandals such as those involving Bernard Madoff and R. Allen Stanford.

Advisers said they were outraged over the uncharacteristically rash way in which the normally consultative Schwab adopted the new policy. Advisers were also upset over having to arrange for asset transfers in such an unforgiving market and client relationship environment. Some sent a letter to top Schwab executives threatening to move other assets to rival custodians if adjustments aren’t made to the ban.

Schwab executives are still working out details of its revisions and are holding one-on-one conversations with affected advisers, the spokeswoman said. Yet while agreeing to extend its deadline, it also is putting new conditions on accepting additional alternative assets. Schwab hasn’t yet spelled out details of the new acceptance policy, but one adviser has been told that registered investment advisers and alternative investment managers likely will have to sign letters indemnifying Schwab for fraud or other liabilities outside purely ministerial custodial and reporting duties.

“This interim process will provide a temporary solution until we have a longer-term servicing relationship in place with an alternate custodian who specializes in the custody of alternative investments,” the spokeswoman said. “Once that’s in place — toward yearend — we’ll begin to assist advisers in moving all existing AI positions.”

For additional details, see the March 17 print edition of InvestmentNews.

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