SEC Plans to Overhaul Custody Rules
In a recent speech, the SEC’s Director of the Investment Management Division, Dalia Blass, revealed that the Division is exploring a rewrite of the custody rules under the Investment Advisers Act and the Investment Company Act. Ms. Blass said the Division will review the Advisers Act custody rule (206(4)-2)) to tailor safeguards while considering the rule’s scope, surprise examination requirement, and the role and requirements for qualified custodians. Ms. Blass also advocated for the modernization of the fund custody rules (17f-1 – 17f-7).
As we argued in our 2017 podcast, the Investment Management Division needs to re-do the custody rule. Nobody understands its requirements, as shown by the 20 pages of FAQs as well as the widespread noncompliance with its esoteric requirements. The rule was a response to the Madoff scandal but overreached into private fund operations, auditor requirements, and banking laws. We recommend that the Division require every adviser to engage a third party compliance review that includes customer asset safeguards.