DTCC Connection

May 01, 2012 • DTCC Connection

AIP: A Game-Changing Rule Amendment

by Rich Marulanda


DTCC’s Alternative Investment Product (AIP) may have reached a critical tipping point in March that will drive further customer uptake of the service.


Here’s what happened.


On March 7, DTCC subsidiary NSCC filed a rule amendment with the Securities and Exchange Commission (SEC) pertaining to broker/dealers’ custody and possession requirements for uncertificated alternative investments. The filing, which took effect immediately, followed a No-Action letter that the SEC’s Division of Trading and Markets issued to Charles Schwab.


"This amendment to our rules provides distributors the opportunity to carry client positions in compliance with custody and recordkeeping requirements, providing a broad-scale industry benefit without significant administrative burdens – one that hasn’t been available until now," said Ann Bergin, DTCC Managing Director and General Manager, Wealth Management Services.


The back story

SEC regulations generally require broker/ dealers to establish physical possession or control of all fully paid securities and excess margin securities they carry for their customers. But the securities of alternative investment products are held in a broker/dealer’s custody. As such, broker/dealers often rely on an SEC rule that allows securities to be held in locations designated by the SEC to be adequate for protecting customer securities.


Over the years, the SEC has permitted broker/dealers to designate certain entities as good control locations for their uncertificated securities, subject to certain conditions, where the entity is obligated to create and maintain the ownership records for the securities. Among these conditions, the broker/ dealer must obtain certain assurances and representations from the control location entity.


An industry milestone

The rule amendment marks a milestone because it allows AIP to offer an industrywide solution that allows securities that are processed on AIP to be deemed in a good control location, further reducing cost and risk, which benefits all parties to these transactions.


What’s more, it allows firms to select AIP as their control location, which Charles Schwab has already done. "We’ve been working with Schwab on this issue and we expect this industrywide relief would further enhance the value of the AIP service and make it more attractive to a broader audience." @


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