SEC CORNER

The Securities and Exchange Commission (the “SEC”) proposed amendments to the Custody Rule under the Advisers Act which governs the custody of client securities and funds by federally registered investment advisers. The proposal seeks to expand the types of assets and activities that are covered under the Custody Rule. The Custody Rule was designed to provide protection for investors against potential insolvency, theft, or misappropriation by investment advisers registered with the SEC. In addition to funds and securities, the proposal would extend the scope of protection to include crypto assets as well as real estate, loans, derivatives, and certain activities such as discretionary trading. Under limited circumstances, the proposed rule would exempt advisers from the surprise audit requirement for certain assets, while still requiring surprise audits in other instances. Additionally, advisers would be required to enter into written agreements with qualified custodians holding client assets over which the adviser has custody. New record keeping requirements with respect to creating and retaining records and documenting client information, including the discretionary authority of the adviser, were also recommended.

Proponents as well as opponents of the amendment agree that trading in crypto assets would still be problematic as such assets do not meet a qualified custodian standard. Both raise concerns that crypto assets run the risk of "causing investors to remove their assets from an entity that has developed safeguarding procedures for those assets, possibly putting those assets at greater risk of loss."