Page 11 - Investment Advisor April/May 2023

The newly proposed custody rule securities with qualified custodians.” and voiced concern with “significant
greatly expands the universe of advisors Gensler went on to state that “based aspects of the proposed approach and its
subject to the rule, legal experts warn. upon how crypto trading and lending implementation timeline,” noting that her
The new Safeguarding Rule pulls in platforms generally operate, investment first ”set of concerns is around timing.”
more advisors because those with “dis- advisers cannot rely on them today as The rule, Peirce said, “has broad impli-
cretionary investment authority” will be qualified custodians. To be clear: just cations for investors, investment advisers,
considered to have custody, “even if the because a crypto trading platform claims and custodians. To get it right, we need
investment adviser does not have the to be a qualified custodian doesn’t mean the thoughtful input of commenters.”
authority to cause the client’s custodian that it is. When these platforms fail— Comments are due 60 days after pub-
to transfer assets to third parties,” Mike something we’ve seen time and again— lication in the Federal Register, “which
McGrath, K&L Gates’ Asset Management investors’ assets often have become does not allow the public enough time
and Investment Funds partner based in property of the failed company, leaving to analyze all aspects of this proposal,
Boston, added in an email. investors in line at the bankruptcy court.” particularly in light of the already load-
The newly proposed rule, McGrath Issa Hanna, partner at Eversheds ed rulemaking docket,” Peirce stated.
said, explicitly includes an advisor’s Sutherland, said that Gensler’s view is “Moreover, the proposed implementa-
“discretionary authority to trade client that the current Custody Rule “already tion period — at one year for large advis-

“I do think that in making these changes, the SEC is removing any
ambiguity over whether crypto assets are covered by the rule, as they
are expanding it to cover all client ‘assets’ over which advisers have

custody, regardless of whether the assets are ‘funds’ or ‘securities.’”

—Issa Hanna

assets and the ability to transfer client applies to most crypto assets over ers and eighteen months for smaller
assets within the definition of ‘custody.’” which investment advisers have custody advisers — is too short.”
With this proposed change, “all of an (because the SEC takes the view that Financial services trade groups
adviser’s authorized trading on behalf most crypto assets are securities).” pressed the SEC in early March to
of its clients” will be subject to the new With that said, Hanna continued, “I extend the comment period on its con-
rule, Bernstein explained. do think that in making these changes, troversial custody rule plan by 60 days.
the SEC is removing any ambiguity over The 12 groups — which include
CRYPTO ASSETS whether crypto assets are covered by the the Securities Industry and Financial
Gensler noted during an early March rule, as they are expanding it to cover Markets Association, the Investment
meeting of the SEC’s Investor Advisory all client ‘assets’ over which advisers Adviser Association and the Investment
Committee that the new safeguarding have custody, regardless of whether the Company Institute — stated in a March 6
rule for investment advisors builds on assets are ‘funds’ or ‘securities.’” letter that the SEC plan is “broad based,
the current 2009 custody rule. The SEC, Hanna added, also is “tak- complex, and technical, proposing chang-
“The expanded custody rule would ing this opportunity to make changes to es that will drastically and permanently
help ensure that advisers don’t inap- the rule that the staff has been eyeing for alter the custody business model and the
propriately use, abuse, or lose investors’ some time – for example, enhancing the prevailing market for custody services.”
assets,” Gensler said. “I know there’s protections that clients get from custo- On Feb. 15, the SEC released the plan
been recent attention to this proposal dians, making changes to the privately for a 60-day comment period. The groups
regarding its intersection with crypto.” offered securities exception, defining stated: “In light of the significance of
Said Gensler: “Make no mistake: Our custody to include discretionary author- the topic and the proposed number and
current custody rule, adopted in 2009, ity, and so on. For most advisers, these magnitude of far-reaching changes, we
covers a significant amount of crypto changes matter a lot more than any of are concerned that the existing comment
assets. Advisers, in complying with the the crypto-related changes.” deadline will not provide us with suffi-
current custody rule, are required to SEC Commissioner Hester Peirce, a cient time to perform the level of analysis
safeguard investors’ crypto funds and Republican, voted no to the SEC’s plan that this proposal warrants.”

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