On February 15, 2023, the Securities and Exchange Commission (SEC) proposed various rule changes to further enhance consumer protections of managed assets by registered investment advisers. Although no changes are set in stone at this time, the SEC’s proposal would amend and restate Rule 206(4)-2 of the Investment Advisers Act of 1940, which would impact the reporting and record keeping requirements of investment advisers.
One of the main initiatives of the new proposal would enhance protections for various securities and physical assets that are not able to be held by qualified custodians. The requirement for these advisers to obtain a surprise examination by an independent public accountant, such as Wolf & Company, would not change. However, the assets subject to this examination may be expanded under the proposed changes. Per the SEC, the proposed safeguarding rule’s enhanced protections would also:
- Require that an adviser enter into a written agreement with and obtain certain reasonable assurances from qualified custodians to ensure clients receive certain standard custodial protections when an adviser has custody of their assets. These protections are designed, among other things, to ensure client assets are properly segregated and held in accounts designed to protect the assets in the event of a qualified custodian bankruptcy or other insolvency;
- Modify the current custody rule’s exception from the obligation to maintain client assets with a qualified custodian for certain privately offered securities, including expanding the exception to include certain physical assets;
- Retain the current custody rule’s requirement for an adviser to undergo a surprise examination by an independent public accountant to verify client assets but expand the availability of the current custody rule’s audit provision as a means of satisfying the surprise examination requirement;
- Amend the investment adviser recordkeeping rule to require advisers to keep additional, more detailed records of trade and transaction activity and position information for each client account of which it has custody; and
- Amend Form ADV to align advisers’ reporting obligations with the proposed safeguarding rule’s requirements and to improve the accuracy of custody-related data available to the Commission, its staff, and the public.
Although the proposed changes further expand reporting and compliance requirements under Rule 206(4)-2, it does offer some relief for investment advisers. The proposal would reduce the costs of having a surprise examination for certain advisers who can satisfy the rule’s surprise examination requirement through financial statement audits that are not limited partnerships, limited liability companies, or another type of pooled investment vehicle. Currently, the exemption only applies to those types of entities.
Although nothing is set in stone, the proposed changes are something for all investment advisers to keep an eye on in the coming months. At Wolf, our team will be following these proposed changes every step of the way.
