SEC custody rules: what you need to know on upcoming changes

investmentnews.com:

Part of the SEC’s mandate is to regulate the activities of Registered Investment Advisers (RIAs). This involves ensuring that advisors adhere to the SEC Custody Rule under the Investment Advisers Act of 1940, specifically Rule 206(4)-2. 

In a nutshell, the Custody Rules define an RIA’s responsibilities in relation to the holding of their clients’ assets.  

So, what is the Custody Rule? What are the SEC Custody Rule requirements? And what are the SEC Custody Rule proposals? For this article, we delve into the important aspects of custody rules and cover its proposed amendments.   

The SEC custody rule applies to RIAs and how their clients’ assets are held. The rules require that:  

The custody rule is one that allows RIAs to hold client assets and securities in a separate account for each client. The account must be under that client’s name or in an account under the advisor’s name. Should any funds be held by the advisor, they must be named as an agent or trustee for their clients.    

In simpler terms, the custody rule requires that all investment advisers and similar entities keep client securities and funds safe while those assets are in the adviser’s possession.  

An investment advisor, trader or broker must keep their client’s assets separate and apart from their own. The financial advisor cannot mix or comingle their clients’ money with theirs or tap into it for the firm’s use.  

There will be other changes to the SEC custody rule that would expand its scope. One of the most significant changes would extend the rule to include a broader range of assets.  

The amendments now have the following assets covered by the custody rule: 

The amendments now also require qualified custodians to keep possession or control of