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The SEC Proposes Significant Changes to Existing Custody Rules for Registered Investment Advisers

Gary Fox
Gary Fox
Regional Director

Ask any Registered Investment Advisers’ (RIA) Chief Compliance Officer and they’ll tell you that Rule 206(4)-2, the “Custody Rule” under the Investment Advisers Act of 1940, can be confusing, challenging, and difficult to navigate. A quick review of the SEC’s National Examination Program lists many violations regarding the rule, many of which stem from RIAs simply having difficulty determining whether they are subject to the rule.

On February 15, 2023, in an attempt to simultaneously add clarification and expand the rule’s scope, the SEC proposed changes designed to “enhance protections of customer assets managed by registered investment advisers.” The rule’s name also got a makeover as the “Safeguarding Rule.” While the proposal is subject to change, the expected result of the changes is that more RIAs will be deemed to have custody. The implications are clear: If you have custody, be prepared to hire an outside auditor to conduct the Annual Surprise Examination required under Rule 206(4)-2(a)(4).

According to the SEC release:

  • The proposed amendments would expand the scope of the current custody rule beyond client funds and securities to include any client assets of which an adviser has custody.
  • “Assets” would mean “funds, securities, or other positions held in a client’s account” and would include all other assets that investment advisers custody for their clients. The term “other positions” includes, among other things, cryptocurrencies and other digital assets, real estate, precious metals, and physical commodities.
  • The safeguarding rule would also explicitly include an adviser’s discretionary authority to trade client assets within the definition of custody.

The comment period on the proposal will remain open for 60 days following publication of the proposing release in the Federal Register. DFP Partners are following the proposal and public commentary closely. If you wish to speak to one of our consultants regarding the release, contact us.

Read the release
Review the fact sheet
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