Protective Custody: SEC Proposes Safeguarding Rule

The SEC on Feb. 15, 2023, announced new proposed obligations for registered investment advisers concerning custody of investor assets. Although the rule is only in proposed form, given the current composition of the SEC, the proposal suggests significant changes are coming for SEC-registered investment advisers on the custody front.¹

The current custody obligations, which exist under Rule 206(4)-2 of the Investment Advisers Act of 1940 (Advisers Act), are colloquially known as the SEC's "custody rule" (Custody Rule). The SEC has proposed replacing the Custody Rule, initially adopted in 1962 and last amended in 2009 (largely in response to the Bernard Madoff and Allen Stanford scandals), with a new rule concerning the "safeguarding" of client assets in the custody of an investment adviser (Safeguarding Rule or the Rule). As with the 2009 amendment, the SEC is reacting, at least in part, to significant turmoil in the financial markets – here, the "crypto winter" and