SEC Proposes Enhanced Safeguarding Rule for RIAs

By: Bobby Dormanesh

On February 15, 2023, the SEC proposed rule changes for registered investment advisers (LINK). Specifically, the changes seek to enhance protections of customer assets managed by registered investment advisers. If adopted, it would amend certain provisions of the custody rule under the 1940 Act, replacing it with the Safeguarding Rule.

Current rule:

The custody rule aims to protect clients’ assets by requiring registered investment adviser to implement certain controls, such as an annual surprise audit and written notification to clients, to confirm that their clients’ assets are safeguarded. Furthermore, it applies to registered investment advisers who have “custody” of their clients’ assets, which means holding, directly or indirectly, client funds or securities, or having the authority to obtain possession of them. The rule applies to security-like assets – namely funds and securities.

Proposed Safeguarding Rule:

The proposed rule expands the application of financial products managed by investment advisers from “funds and securities” to client “assets,” which includes physical assets, including artwork, real estate, precious metals, or physical commodities. Outside of physical assets, the proposed rule’s definition of assets would include crypto assets, financial contracts held for investment purposes, collateral posted in connection with a swap contract on behalf of the client, and other assets that may not be clearly funds or securities covered by the current rule.

Like the provisions required under the current rule, investment advisers with custody of client assets would be required to maintain those assets with a qualified custodian. This broadening of the rule to include assets presents a potential shift in how fund managers hold their assets.

Next steps:

We are little more than 50% of the way through the comment period, which remains open for 60 days following the publication. After the comment period ends, the SEC will review and consider comments received, and may also hold public hearings or meetings to gather additional feedback. Based on the comments and feedback received, the SEC may issue a final rule that incorporates changes or modifications to the proposed rule.  

How we can help

CLA is here to help you navigate the regulatory landscape. If the new rule takes effect, investment advisers and other regulated entities will need to adjust their practices and procedures to comply with the new rule by an effective date.  Our team members are available to help you identify right solution to confirm your compliance needs are met.