The Securities and Exchange Commission (SEC) proposed to amend Rule 206(4)-2 under the Advisers Act (currently known as the Custody Rule) and redesignate it as the Safeguarding Rule (new rule 223-1 under the Advisers Act). Amendments to the current rule are intended to strengthen investor protections related to advisory client assets and to “expand the scope of the current Custody Rule beyond client funds and securities to include any client assets for which an adviser has custody.” Key provisions are outlined below.
The SEC notes that the proposal “maintains the core purpose of protecting client assets from loss, misuse, theft, or misappropriation by, and the insolvency or financial reverses of, the adviser and maintains the Commission’s ability to pursue advisers for failing to properly safeguard client assets under the [Advisers] Act’s antifraud provisions.”
Expanded Scope. Under the proposed rule, the SEC would expand the definition of “assets” to include “funds, securities, or other positions held in a client’s account.” The new definition would encompass the entirety of a client account’s positions, holdings, and investments including short positions and written options; all crypto assets, including those that do not meet the definition of a fund or security; financial contracts held for investment purposes, collateral posted in connection with a swap contract on behalf of the client, or other assets that may not be clearly funds or securities covered by the Custody Rule; physical assets (e.g., artwork, real estate, precious metals, and physical commodities such as wheat and lumber); and certain assets that might be accounted for as liabilities or financial obligations.
Custody. “Custody” would be defined to mean “holding, directly or indirectly, client assets, or having any authority to obtain possession of them.” Such authority would include “discretionary authority” as defined in the rule. With limited exception, investment advisers would continue to be required to maintain client assets for which they have custody with a “qualified custodian” (defined to include banks, savings associations, registered broker-dealers, registered futures commission merchants, and certain foreign financial institutions (FFIs) that meet specific conditions and requirements). Further, the qualified custodian would be required to have “possession or control” of the clients’ assets.
Enhanced Protections. The proposed Safeguarding Rule would also provide for additional enhanced protections including:
Additional Amendments. Provisions under the proposed rule would also amend:
Comment Period. The SEC requests comment on the proposed changes and listed questions to be submitted no later than 60 days after the date of publication in the Federal Register.