February 22, 2023

Safeguarding Rule for Registered Investment Advisors


Safeguarding Rule for Registered Investment Advisors

On February 15, the Securities and Exchange Commission (SEC) published a press release regarding an amendment and redesignation of rule 206(4)-2 Custody of Funds or Securities of Clients by Investment Advisers, the Custody Rule, as part of the Investment Advisers Act of 1940 and amend certain related record keeping and reporting obligations. This proposal would create new rule 223-1 Safeguarding Advisory Client Assets, the Safeguarding Rule, with similar intent to continue protecting assets from being lost, misused, stolen, misappropriated, or from an adviser’s insolvency or bankruptcy. 

Key takeaways from the publication include the following:

Broadening in Scope: Currently, the Custody Rule focuses on client funds and securities, but this proposal takes it one step further by including other positions held by a client that an adviser has possession or could obtain possession, of and its related activities. The definition of custody will also be enhanced to include an adviser’s discretionary authority to trade client assets, but this may not trigger an annual surprise exam component.

Enhanced Protections: Advisers would need written agreements with qualified custodians regarding possession and control of the assets, including reasonable assurances regarding the protection of client assets, particularly when the custodian may have a conflict of interest. Some of these contractual terms relating to record keeping, client account statements being sent to the adviser versus conducting a reasonable basis due inquiry test, internal control reports, and the adviser’s agreed-upon level of authority to effect transactions in client accounts. 

Recordkeeping and ADV Updates: As with most rule updates, enhanced record-keeping and additional disclosures will be included. The proposal would streamline and enhance the ADV’s Item 9 with additional reporting requirements regarding qualified custodians and reporting applicable client assets, reliance on exemptions, and physical holdings, while streamlining Item 9A and 9B, and Item 9’s surprise examination components for which the SEC sees consistent errors within. 

With record keeping, rule 223-1 would require the following documents to be maintained, whether that be with the adviser or as part of the contractual obligations with the qualified custodian:

  • Client Communication

  • Account Activity

  • Client Accounts

  • Independent Public Accountant Engagements 

  • Standing Letters of Authorization

There is a lot to digest with respect to this proposal and a lot may change. We will continue to monitor the progress of the rule.  The comment period on the proposal will remain open for 60 days and comes with a compliance date of one year from publication. Should you wish to learn more the SEC has provided a Fact Sheet. Please contact your AdvisorAssist Consultant should you have any questions.


Post a Comment