Advisors, Industry Groups Condemn SEC Custody Proposals

Financial Advisors


Organizations and financial firms representing investment advisors said the proposal to overhaul custody rules would impose significant costs and regulatory burdens on investment advisors and squeeze their freedom to manage client accounts. warned to.

The proposal, announced by the Securities and Exchange Commission in February and occupying 121 pages in the Federal Register, expands custodial obligations beyond securities and funds covered by current rules and would allow all assets in a client’s portfolio to be that includes. It will wipe out private securities, real estate, derivatives and other assets. We will also expand storage in crypto assets that are not securities.

According to the SEC fact sheet, under this proposal, an advisor who can trade on behalf of a client would be deemed to be in control of the client’s assets. The proposal also requires advisors to enter into written agreements with qualified managers to protect client assets. Eligible custodians include institutions such as banks, broker-dealers and trust companies.

SEC Chairman Gary Gensler said the first custody rule update in 14 years is needed to ensure that “advisors do not improperly use, lose or misuse investor assets.”

Industry groups agreed with that goal in principle, but strongly opposed the SEC’s proposed approach. In a comment letter closed Monday, they questioned the rule’s legitimacy and accused the SEC of overreaching regulation.

“This proposal is intended for advisors, their clients, and [qualified custodians] But we haven’t been able to prove that modest improvements in asset protection justify such burdens and costs,” Kevin Carroll, deputy general counsel for the Securities Industry and Financial Markets Association, commented Monday. “Unfortunately, the biggest losers in the proposal seem to be the advisor’s clients. [qualified custodians] Provide services, reduce access to markets and products, and increase advisory and storage fees. “

Expanding the definition of custody to include an advisor with discretionary powers to transact on behalf of a client has drawn criticism from investment advisor associations.

IAA General Counsel Gail Bernstein and Deputy General Counsel Laura Grossman said in a May 8 comment letter that the provision “would make it impossible to conduct transactions on behalf of clients.” wrote. “It is particularly difficult for advisors to trade asset classes that do not settle on a delivery-to-payment basis. By limiting the number of investment advisors, we do harm to investors.”

The Investment Companies Institute, which represents mutual funds, said the provision would create a “significant number of practical difficulties” for advisers.

“For example, equating discretionary trading with custody could equate the advisor with custody of thousands of additional client accounts, even though the relationship between the advisor and the client has not changed.” ICI Deputy General Counsel Dorothy Donoghue wrote in a May 8 comment. letter.

The proposal would also impose unwieldy requirements on the relationship between advisers and custodians, according to the IAA.

The IAA’s Bernstein and Grossman said, “Many of the requirements of the proposed rule would force advisors to police the commercial terms between clients and custodians on matters unrelated to the investment advice they provide. “We have pointed out in a similar context to the Commission’s proposed rule on outsourcing by investment advisors that this kind of ‘backdoor’ regulation is inappropriate and undermines the regulatory purpose of the custody rule, We believe it unduly imposes a regulatory burden. “

Public Citizen supported the SEC’s proposal in part because it would impose custody requirements on crypto assets.

In a May 6 comment letter, Public Citizen said, “Today, cryptocurrency trading takes place in the Wild West, a deliberate display of law and order.” We welcome your efforts.”

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