Wednesday, September 06. 2023
SEC Reopens Comment Period for Proposed Safeguarding Rule
The SEC has recently voted to reopen the comment period for its February 2023 proposal, Safeguarding Advisory Client Assets, which proposed a new rule under the Investment Advisers Act of 1940 that would redesignate and update the current custody rule to improve protections of customer assets managed by registered investment advisers. In compliance with the audit provision of the current custody rule, the adoption of the private fund adviser audit rule generally requires a registered investment adviser to obtain an annual financial statement audit of each private fund it advises. Reopening the comment period provides interested parties with additional time to review the proposed amendments to the current custody rule’s audit provision under the private fund adviser audit rule. The rule initially was proposed by the SEC on February 15, 2023 with a comment period that ended on May 8, 2023.
Should the proposed rule be adopted, it would:
- modify the current custody rule’s exception from the obligation to maintain client assets with a qualified custodian for certain privately offered securities (including expanding the exception to include certain physical assets)
- update the investment adviser recordkeeping rule under which advisers would be required to keep additional, more detailed records of trade and transaction activity and position information for each client account of which it has custody
- revise Form ADV to both align advisers’ reporting obligations with the proposed safeguarding rule’s requirements and improve the accuracy of custody-related data available to the SEC, its staff, and the public
- require that an adviser enter into a written agreement with and obtain certain reasonable assurances from qualified custodians to ensure clients receive certain standard custodial protections when an adviser has custody of their assets. These protections are designed, among other things, to ensure client assets are properly segregated and held in accounts designed to protect the assets in the event of a qualified custodian bankruptcy or other insolvency
- maintain the current custody rule’s requirement for an adviser to undergo a surprise examination by an independent public accountant to verify client assets but expand the availability of the current custody rule’s audit provision as a means of satisfying the surprise examination requirement
Interested parties may submit feedback on the reopening during the public comment period, which will remain open for 60 days following publication in the Federal Register. For further details, including ways to respond, refer to the Safeguarding Advisory Client Assets; Reopening of Comment Period proposed rule on the SEC’s website.
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