SEC Proposes Changes to Advisers Act Custody Rule

In February, the Commission proposed changes to the Custody Rule (Rule 206(4)-2) of the Investment Advisers Act of 1940, proposing instead a new rule, referred to as “the Safeguarding Rule” (Rule 223-1). The current custody rule only applies to client funds and securities, however, the new rule applies to client assets which includes “funds, securities, or other positions held in the client’s account” as noted in the proposal. This would include crypto assets even in the instances where “such assets are neither funds nor securities.” The Goodwin client alert lists several additional implications of proposed changes, including:

  • Moving digital assets out of a qualified custodian into an account with an exchange or trading venue that does not qualify as a qualified custodian for purposes of transacting would violate the Safeguarding Rule, seemingly limiting compliant models for trade execution for RIAs to transactions involving settlement directly into and out of a qualified custodian.
  • No clear exceptions exist for digital assets that are not supported for custody by any qualified custodian.
  • Potentially significant repapering burdens in order for existing custodial documentation to be brought into compliance with the proposed written agreement and written assurances requirements of the Safeguarding Rule.

In her remarks on the proposal, Commissioner Hester Peirce noted the Custody Rule “after fourteen eventful years, deserves another update” but expressed concerns with the brief 60 day comment period, the proposals “workability” around required written agreements, and the approach with regards to crypto custody, among other concerns. In his statement of support, SEC Chair Gary Gensler stated “through this expanded custody rule, investors working with advisers would receive the time-tested protections that they deserve for all of their assets, including crypto assets, consistent with what Congress envisioned.” The comment period will remain open for 60 days following publication of the proposing release in the Federal Register.

Click here to read the proposed rule on “Safeguarding Advisory Client Assets.”
Click here to read the Commission’s press release concerning the proposed rule.
Click here to read a client alert from Goodwin on the proposed rule.