check 21 and the custody rule

Compliance colleagues:

I am wondering if anyone is aware of any regulatory guidance regarding using the Check 21 or similar technology to deposit client investment checks into their brokerage accounts and the custody rule. Specifically, once checks are scanned and deposited into the client's account, does the firm run the risk of being deemed to be in custody of client funds by holding onto the canceled checks beyond the three day carve out under the rule? Any feedback is welcome and appreciated. Thanks.

Comments

  • We wrestled with this same question, as some of the custodial contracts for electronic check scanning require the adviser to hold onto the paper checks for longer than three days. We have a set schedule of when paper checks are shredded after they are scanned and accepted for deposit depending on the custodian. We typically shred the paper checks within three days to be safe, but apparently one custodian put on a webinar on this topic and took the position that holding on to the paper checks beyond three days wouldn't trigger any custody concerns because the check isn't really a negotiable instrument after the funds hit the client's account.
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