The proposed Safeguarding Rule would:
- Broaden the rule to cover a greater array of assets including digital assets and real estate
- Update recordkeeping and reporting requirements for advisers
- Enhance the custodial protections that client assets receive under the rule
If adopted, the Safeguarding Rule would represent another major change in the regulation of custodial practices under the Advisers Act and would likely present compliance challenges for Investment Advisers.
Proposed amendments
The proposed amendments redesignate the Custody Rule as a new Rule 223-1 under the Advisers Act to strengthen the rule’s protections of assets from the “advisers’ own insolvency or bankruptcy and from the assets being lost, misused, stolen, or misappropriated”. Read the below summary of some proposed changes:
- Expansion to the types of client assets: The proposed amendments would expand the client assets captured within the Safeguarding Rule beyond funds and securities in client accounts to include fund, securities, or other positions of which the adviser has custody. This would include digital assets, real estate, and written options.
- Required agreements with qualified custodians: The proposed amendments would require an adviser to enter into a written agreement with and obtain certain reasonable assurances from qualified custodians to ensure clients receive standard custodial protections from the adviser.
- Maintain performance of surprise audits: The proposed amendments would retain the current Custody Rule’s requirement for an adviser to undergo a surprise audit by an independent public accountant to verify assets.
- Amend the record keeping rule: The proposed amendments would amend the recordkeeping rule to require advisers to keep more detailed records of trade and transaction acidity and position information for each client account it has custody of.
- Amend Form ADV: The proposed amendments would align advisers’ obligations with the proposed Safeguarding Rule’s requirements and improve the accuracy of custody-related data available to SEC staff.
While the proposal has yet to be confirmed, adequate preparation to comply with the SEC’s new Safeguarding Rule should become a priority for registered Investment Advisers. Advisers should evaluate how the proposed amendment will affect them and take tangible steps to ready themselves for a version of the proposed amendments to pass.
The comment period for each proposed amendment will remain for 60 days after publication in the Federal Register. If adopted, the compliance date would fall 1year after the amendment takes effective.
How can we help you?
Our Global Compliance team has many years of experience managing SEC regulatory compliance programs, giving clear insight into how to help Advisers interpret and navigate the implementation of procedures to comply with new regulations and prepare for SEC examinations.
If you require more information, please reach out to Michael Barakat, Assistant Director, Compliance on michael.barakat@apexfs.com.
