The Proposed Custody Rule 223-1 is a proposed rule by the U.S. Securities and Exchange Commission (SEC) regarding the custody of assets, securities, or funds of clients by Investment advisers. The Securities and Exchange Commission (SEC) made this known to the public in a press release on February 15, 2023.
Aim of the Proposed Custody Rule:
The proposed custody rule aims to modernize the regulatory framework on how investment advisers offer their products and services to their clients. It also proposes complementary refinements to how advisers report custody information on Form ADV. Also, it highlighted the books and records investment advisers are required to keep that are designed to improve the SEC’s oversight and risk-assessment abilities.
The US SEC proposal maintains the core purpose of protecting client assets from loss, misuse, theft, or misappropriation by advisers. It also protects client’s assets from insolvency or financial reverses of the adviser. In addition, it maintains the Commission’s ability to pursue advisers for failing to properly safeguard client assets under the Act’s antifraud provisions.
Here are some of the key points of the Proposed Custody Rule:
- The proposed custody rule seeks to simplify today’s complex and global financial markets and its application to better align with the Commission’s statutory authority.
- Since the adviser will be dealing with an array of classes of assets, the proposed custody rule requires minimum protection for the client’s assets held in advisory accounts.
- The proposed rule also would explicitly include discretionary authority to trade within the definition of custody under the Custody Act.
- The proposed rule seeks to change the existing regulation’s exclusion of certain physical assets from the requirement to retain client assets with a qualified custodian with respect to privately issued securities.
Under the Proposed Custody Rule, advisers with custody of client assets would be required to segregate those assets by:
(1) Titling or registering the assets in the client’s name or otherwise holding the assets for the client’s benefit.
(2) Not commingling the assets with the adviser’s or any of its related persons’ assets, and
(3) Not subjecting the assets to any rights, charges, security interests, liens, or claims of any sort in favor of the investment adviser or its connected parties or creditors, unless expressly permitted by the client in writing.
The Proposed Custody Rule Aims to Improve and Modernize Recordkeeping for Advisers.
Along with the proposed regulation, the Proposal also aims to improve and modernize the recordkeeping obligations for advisers. It is anticipated that these modifications would improve the Commission’s oversight of advisers’ safety procedures and rule compliance, which will advance investor protection.
In order to improve the accuracy of custody-related data made accessible to the Commission, its employees, and the general public, The US SEC is also proposing changes to Form ADV. These changes would align reporting requirements with the proposal.
It’s worth noting that this is a proposed rule, and it has not yet been adopted or implemented. The US SEC is currently soliciting comments on the proposed rule within 60 days from the day of publication of the rules from stakeholders and the general public, and any final rule will likely take into account the feedback received.
Follow A&D Forensics for Data-driven content on regulations, policy, and innovations in cryptocurrencies.