Yesterday, the SEC proposed rule changes designed to enhance protections of assets managed by Registered Investment Advisers. If adopted, the changes would update the Advisers Act “Custody Rule” (Rule 206(4)-2) as a new “Safeguarding Rule” (Rule 223-1). Additionally, the changes would amend certain related recordkeeping and reporting obligations.
We are in the process of reviewing the 400+ page proposal, but here are some highlights below.
The proposal:
- Expands the scope of “assets” from “funds and securities of which an adviser has custody” to mean “funds, securities, or other positions held in a client’s account” which would encompass, for example, crypto assets or other assets that are unable to be maintained with a qualified custodian.
- Updates the definition of custody to explicitly include discretionary authority to trade. This appears largely intended to set the initial scope, as there also is an exception to the surprise examination requirement where the sole reason for having custody is due to discretionary authority where;
- assets are maintained with a qualified custodian, and
- discretionary authority is limited to instructing the custodian to transact on a delivery-versus-payment basis (such that the value does not leave the client account with the qualified custodian).
- Requires that advisers enter into an agreement with custodians, obtaining certain assurances with regard to traditional custodial protections such as segregation of accounts.
- Updates the exception from the qualified custodian requirement for private placements, including expanding the exception to include certain physical assets.
- Expands the availability of the audit provision as an alternative to the surprise examination requirement.
- Requires more detailed records of transaction and position information for client accounts.
- Updates disclosure requirements for Form ADV Part 2A Brochure.
The proposal will remain open for the next 60 days for comments. We will continue to monitor the SEC’s decision in terms of the proposal. We are only halfway through the first quarter, but the Commission has already been busy so far.
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Call us today at (212) 706-4029 x 229, or shoot us an email at info@SEC3compliance.com so we can set up a time for one of our consultants to discuss your needs and how we can help.
