SEC Proposes Strengthening of Advisers Act Custody Rule

As expected, on May 14 the Securities and Exchange Commission (SEC) proposed changes to the custody rule under the Investment Advisers Act of 1940, Rule 206(4)-2, that will affect the roughly 9,600 investment advisers that the SEC reports have custody of client assets either directly, through affiliated custodians, or by virtue of being able to debit their fees from client accounts.

Although the SEC stated that among the proposal's aims is the promotion of independent custodial arrangements, it did not mandate the use of independent custodians as some had feared it might seek to do. In fact, rather than restricting or barring those broker-dealers that are also registered as advisers from serving as qualified custodians for their advised client accounts or the accounts of their investment adviser affiliates, the SEC proposal extends some of the custodial controls now applicable to broker-dealers to investment advisers deemed to have custody of client assets. Based on the discussion at the SEC's open meeting, the proposal would affect custodial arrangements in three principal ways.

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