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News March 26, 2012 Issue

Alts Custody No-Action Relief Becomes a Rule

Just as soon as the SEC granted exemptive relief to Charles Schwab, they followed themselves up with a rule on the issue.

In February, the Division of Trading and Markets allowed Schwab to use a Depository Trust and Clearing Corp. (DTCC) service named Alternative Investment Product (AIP) for the custody of alternative assets. The relief said Schwab could consider AIP as a ‘good control location’ for purposes of the broker-dealer custody rule, Rule 15c3-3 under the Securities Exchange Act.

This is potentially a boon to advisers who custody client assets through broker-dealers, but have struggled with the handling of uncertificated interests in private funds and other private securities within the confines of the Advisers Act custody rule.

On March 7, a rulemaking filed with the SEC by DTCC subsidiary National Securities Clearing Corp. (NSCC) became immediately effective, clearing the way for broader industry use of the AIP service without the uncertainty of factual circumstances that may vary from the specifics of the Schwab no-action relief.

"AIP continues to bring much needed operational relief to the alternatives marketplace with this latest breakthrough. …Now that we have extended the platform’s capabilities to address custody and possession requirements, we anticipate adoption of the service to accelerate," said Ann Bergin, managing director and general manager, DTCC Wealth Management Services.

Since inception of the service, AIP has standardized the way the alternative investment industry communicates information related to these investments. The AIP service links global market participants, including broker/dealers, fund managers, administrators and custodians, providing an end-to-end processing solution for uncertificated alternative investment securities such as interests in hedge funds, funds of funds, private equity funds, managed futures funds, and non-traded real estate investment trusts.

Investment in alternatives typically involves hard copy records and annual audits that must be distributed to investors. DTCC has been working with Schwab and others for more than two years to develop a solution for the lack of automation and centralization associated with investment in alternative assets and their custody.

In addition to providing a compliant custody alternative, the AIP service streamlines, automates, and centralizes all the processes related to trade order initiation, money settlement and post-trade reporting for alternative investments. The AIP service, said Bergin, offers operational efficiencies, risk mitigation and transparency to the alternative investments community, which in turn, DTCC hopes should facilitate market growth.