February 15, 2023
The Investment Adviser Association agrees with the SEC that safeguarding client assets is of paramount importance and we also agree that the current rule is in need of modernization. The question for us is how best to get there, and that question warrants careful consideration by all stakeholders.
While we’re just beginning to analyze the proposal, and will work closely with our members to assess its implications, we have a few general observations.
Today’s proposal is a major departure from how the rule will treat an adviser’s discretionary advice and will subject all of an adviser’s authorized trading on behalf of its clients to the new rule. This narrows even further a position the SEC staff has taken over the past few years applying the Custody Rule differently based on how a transaction settles. This is an issue the IAA advocated on and we’re reviewing the release to assess the implications of the proposed changes.
While the IAA is very pleased that the SEC is responding to our concerns and acknowledging the unique challenges faced by smaller advisers by proposing to stagger the compliance runway, we don’t believe that this will be enough time given the proposal’s complexity and the changes that will be required. We also have concerns that the threshold the SEC proposes for these staggered dates does not adequately recognize the personnel and infrastructure constraints on smaller advisers. The IAA intends to continue to advocate for our smaller members to ensure that any final rule recognizes the extent of the burdens being placed on smaller advisers and considers less burdensome ways to achieve the SEC’s goals.
The proposal represents a sea change in the current relationship that clients have with their custodians and the IAA is diving in to understand its implications, especially for smaller advisers that have little leverage to negotiate contracts with specific terms with custodians, especially those not regulated by the SEC.
The proposal expands the reach of the rule well beyond what it is today. It will expand from covering a client’s funds and securities to include all assets in a client’s portfolio with an adviser, like crypto, derivatives, real estate, and more. This expansion will have important implications for advisers, clients, and the markets.
We are concerned that today’s proposal will substantially extend the current Custody Rule with a very tight timeline in light of its complexity and the very full regulatory agenda. This will make thoughtful and thorough input very challenging, especially given how the many outstanding proposals might interact with one another.
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