SEC Proposes Sweeping Safeguarding Rule for Registered Investment Advisers

On March 9, 2023, the Securities and Exchange Commission (SEC) published proposed rules imposing significant revisions to Rule 206(4)-2 (Custody Rule) under the Investment Advisers Act of 1940 (Advisers Act). SEC’s proposal would replace the Custody Rule with a comprehensive set of new requirements found in proposed Rule 223-1 (Safeguarding Rule) of the Advisers Act. The proposed rules would also amend Rule 204-2 and Form ADV under the Advisers Act to require additional records and information from registered investment advisors.

The proposed rules would have far-reaching implications for investment advisors, auditors, and “qualified custodians.” Qualified custodians include banks and savings associations, broker-dealers, futures commission merchants, and certain foreign financial institutions. Among other things, the proposal would:

  • Subject all assets to the Safeguarding Rule, including cryptocurrency, derivatives, and physical assets like real estate.
  • Treat discretionary authority as a form of custody, thereby increasing the number of registered investment advisors deemed to have custody of client assets.
  • Require registered investment advisors to enter into written agreements with the qualified custodians holding their clients’ assets, thereby imposing new recordkeeping and reporting obligations on those custodians.
  • Require registered investment advisors to obtain reasonable assurances of certain minimum investor protections from qualified custodians.

Comments are due by May 8, 2023.

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