No-action letter could signal next step for alts custody
A no-action letter that The Charles Schwab Corp. received last month from the Securities and Exchange Commission could…
A no-action letter that The Charles Schwab Corp. received last month from the Securities and Exchange Commission could accelerate efforts to streamline trading and custody of alternative investments.
The letter essentially OKs Schwab’s use of the Depository Trust and Clearing Corp.’s Alternative Investment Product service to provide custody services for alternatives and report them on Schwab statements.
The no-action letter defines AIP as a “good control location” under customer protection rules, said Ann Bergin, DTCC’s managing director of wealth management services.
AIP centralizes data and links various market participants to provide settlement and trade processing of alternative assets.
“We’ve been working with Schwab from the outset on this,” Ms. Bergin said. “The plan is to leverage the no-action letter and file a rule with the SEC, so [the no-action] relief would extend to the whole marketplace.”
Although other industry participants can rely on the Schwab letter, “I don’t know if everyone is completely comfortable with that,” Ms. Bergin said.
An industrywide rule would accelerate adoption of the AIP service and streamline the administration of alternatives, she said.
AIP now has 50 to 60 users, with about the same number in the pipeline.
DTCC plans to file the proposal “in the very near term,” Ms. Bergin said.
It would mimic Schwab’s no-action letter.
“We’ve been working for two and a half years to get the SEC to opine on the AIP service,” said Bernie Clark, head of Schwab Advisor Services.
Prior to the no-action letter, the service “might have been operationally effective, but it didn’t really have a lot of meaning,” he said. “You still had to document [the asset’s location], verify prices and all of that.”
Now, once an asset is on AIP, Schwab should have it available to financial advisers in about 48 hours, Mr. Clark said.
Schwab plans to encourage sponsors of alternative products to use the AIP service and has a conference call scheduled next month with its own registered investment advisers to explain the service.
Mike Wood, director of alternatives at Schwab, will be more active in promoting the AIP service to sponsors, Mr. Clark said.
In early 2009, in the wake of the Bernard Madoff scandal, Schwab temporarily stopped accepting new alternative products onto its custody platform. Schwab reopened the alternatives spigot a year later, but its move left some advisers upset.
Since then, the firm has seen the AIP service as an important tool in helping qualify alternative assets for custody.
“We see some assets moving off of the Schwab platform simply because they’ve been asked” to leave, said Ronald Ferguson, chief executive of National Advisors Trust Company FSB.
Schwab’s embrace of the AIP service is a positive, he said, adding that “almost every custodian is embracing” that protocol.
The no-action letter “appears to be a step in the right direction,” said John Tovar, managing director at TD Ameritrade Institutional, who heads up operations.
“Having a standard platform creates lot of efficiencies,” he said.
“We’ve been an early adopter of the AIP service” and have been encouraging sponsors to join, Mr. Tovar said.
Fidelity Investments also has been working with DTCC on the AIP service, spokesman Steve Austin said.
“We are pleased to hear about the SEC no-action letter, as this will streamline the custody process,” he wrote in an e-mail.
By filing a rule, DTCC “is attempting to create a [trading] standard, which makes a lot of sense,” said Kelly Rodriques, chief executive of Pensco Trust Co.
But not all alternative products have enough trading volume to qualify for DTCC membership, he said.
The assets that don’t have a sponsor likely won’t qualify under terms of the letter, Mr. Rodriques said.
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