New SEC Proposed Rule | RIA Protection of Customer Assets
SEC Releases
Who Would This Affect?
- Registered Investment Advisers (“RIAs”)
- Qualified Custodians
Brief Synopsis
The SEC announced a Proposed Rule on February 15th to amend and redesignate rule 206(4)-2 of the Advisers Act.
The goal of this Proposed Rule is to enhance the protections surrounding client assets. The SEC hopes to adjust to changes in technology, advisory services, and custodial practices since the Rule’s last amendment in 2009.
The Custody and Safeguarding Rule Proposals
- The custody rule would apply to all client assets that the RIA has custody over, instead of solely client funds and securities.
- The adviser’s discretionary authority to trade client assets would explicitly be within the definition of custody.
- RIAs with custody of client assets are required to maintain the assets with a qualified custodian, who would have “possession or control” of the assets.
- There would be additional requirements for institutions to exist as foreign financial institutions.
- Advisers would need written agreements from custodians that clients receive certain standard custodial protections, including, but not limited to:
- Client assets should be properly segregated.
- Assets should be held in accounts to protect assets from custodian bankruptcy or other insolvency.
- Advisers would still be required to undergo a surprise examination by an independent public accountant, but certain custodial audit requirements could count towards that requirement.
- Advisers would need to keep more detailed records of trade, transaction activity, and position information for each client account in their custody.
- Form ADV would be amended to align reporting obligations with the safeguarding rule’s requirements, improving accuracy of custody-related data for the SEC and public.
Vigilant’s Final Conclusion
Upon publication in the Federal Register, there will be a 60-day comment period for interested parties to respond.
RIAs should consider their Compliance Procedures, and evaluate their agreements with qualified custodians to see that client assets are given the expected protections by the SEC.
If you have any questions about how this new Proposed Rule could affect your business, please reach out to us.