Schwab says SEC stance a win for alternative assets

Wed Mar 7, 2012 5:06pm EST

* Schwab says SEC OKs broker-dealers' use of AIP platform

* Company says platform will save time for advisers

By John McCrank

NEW YORK, March 7 (Reuters) - The process of buying and selling of hedge funds and other alternative investment assets will be much smoother for financial advisers following the U.S. Securities and Exchange Commission's acceptance of a standardized framework for doing so, said Charles Schwab Corp .

Schwab said the SEC recently confirmed in a letter it would take no civil or criminal actions against broker-dealers for using the Depository Trust & Clearing Corp's (DTCC's) Alternative Investment Products service (AIP) to establish compliance with a broker's possession and control requirements.

DTCC began piloting AIP following the financial crisis in response to calls for more standardization and transparency in dealing with alternative assets. It based AIP on its Fund/SERV platform, which it launched around 20 years ago and is now the industry standard for processing and settling mutual fund transactions.

AIP automates and centralizes the processes related to trade order initiation, money settlement and post-trade reporting of pooled funds, such as hedge funds, funds of funds, private equity funds, and non-traded real estate investment trusts.

Before AIP, the due diligence fell on Schwab and other broker dealers, and the process could take weeks. Bernie Clark, head of Schwab's adviser services unit, said that with AIP, it expects to be able to conduct transactions for clients who want to purchase alternative investments within 48 hours.

"It's a big win administratively and it's a big win in time saving,", he said.

About 7,000 registered investment adviser firms managing around $700 billion in assets use Schwab as a custodian. Of that, around $5 billion is currently invested in alternative assets.

"Although it's a small portion of the portfolio of the adviser, it is incredibly important that we have this capability so that we can handle their entire portfolio, so it's big, although the numbers right now are small," said Clark.

He said he expects alternatives will become a more bigger part of advisers' portfolios over time as more providers enter the space and product development speeds up.

DTCC said on Tuesday that it would soon file a proposed rule change with the SEC to amend its AIP rules. The proposal, if adopted, will allow AIP participants to meet certain custody requirements for uncertified alternative investment securities, if those positions are processed on AIP.

"This development will improve significantly the transparency, efficiency and risk profile of the current processes," DTCC said.

DTCC provides clearance, settlement and information services for equities, bonds, government and mortgage-backed securities, money market instruments and over-the-counter derivatives.

DTCC's depository provides custody and asset servicing for almost 3.7 million securities issues from the United States and 121 other countries and territories, valued at $39.5 trillion. In 2011, DTCC settled nearly $1.7 quadrillion in securities transactions.

Schwab said it will host a webcast in April to help educate advisers on AIP and how it will affect Schwab's custody of alternative assets.