Insights & News

SEC Proposes New Rule Addressing Investment Adviser Safeguarding of Client Assets

March 27, 2023
Client Alert

On Feb. 15, 2023, the Securities and Exchange Commission (SEC or Commission) proposed to replace the existing custody rule (the Current Custody Rule) under the Investment Advisers Act of 1940 (the Advisers Act) with a new one addressing the safeguarding of client assets (Safeguarding Rule). If adopted as proposed, the Safeguarding Rule would fundamentally transform custody arrangements and may result in advisers, particularly smaller advisers, being unable to offer certain asset classes. This alert summarizes the Safeguarding Rule and highlights some key observations and issues for investment advisers to consider.

Key Takeaways

  • Would dramatically expand the custody rule.
  • Would require substantial additional services from custodians and auditors.
  • Would require significant costs to both advisers and custodians, which may be passed on to investors.
  • Would have a chilling (or freezing) effect on advisers seeking to provide crypto asset services.

The Safeguarding Rule
The Safeguarding Rule differs from the Current Custody Rules in three main areas: (1) a broader array of client assets and advisory activities are subject to the Safeguarding Rule’s protections; (2) the custodial protections for client assets required under the Safeguarding Rule are much more prescriptive and (3) related recordkeeping and reporting requirements for advisers are updated.

Comments on the Safeguarding Rule are due by May 8, 2023. Read full article here.

Information contained in this publication should not be construed as legal advice or opinion or as a substitute for the advice of counsel. The articles by these authors may have first appeared in other publications. The content provided is for educational and informational purposes for the use of clients and others who may be interested in the subject matter. We recommend that readers seek specific advice from counsel about particular matters of interest.

Copyright © 2023 Stradley Ronon Stevens & Young, LLP. All rights reserved.

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