Potential Changes Coming to the SEC’s Custody Rules in 2023

By Andrew K. Sledd, CPA, CFE, Partner

Potential Changes Coming to the SEC’s Custody Rules in 2023

Proposed rules address safekeeping of crypto and digital assets

With the ever-increasing popularity of digital or crypto assets and currencies, it’s no surprise that in February 2023 the Securities and Exchange Commission (SEC) proposed new rules for registered investment advisers (RIAs) that would replace the current “custody rule” with a new “safeguarding rule.” If the proposed rule is adopted the current custody rule would be renumbered from Rule 206(4)-2 under the Advisers Act and be recodified as Rule 223-1 under the Advisers Act.

The proposed safeguarding rule would broaden the current custody rule beyond client cash and securities to include all client assets that the registered investment advisor (RIA) is deemed to have possession of or could obtain possession of through client granted authority. The major impact of this proposed rule is bringing digital assets into the scope of the custody definition as digital assets are not currently defined by the SEC as cash or securities.

The primary intent is to require safekeeping of all client assets with a qualified custodian, such as banks or registered broker-dealers in securities. The proposal would require that there are standard practices in place and maintained at the qualified custodian to ensure client assets are segregated and held in separate accounts to protect those assets in the event the qualified custodian experiences any insolvency issues. The safeguarding rule would also require enhanced protections for certain assets that cannot be maintained by a qualified custodian.

How would the proposed rules impact surprise examinations?

The proposal would not change the current requirement for RIAs to receive an annual surprise examination by an independent public accounting firm but it would expand the ability to use the audit provision exemption. While the surprise examination requirement has not change under the proposed rule the scope of the surprise examination will be expanded to include all client assets versus just client cash and securities. There would also be a limited exception under the proposed rule to not require a surprise examination if the RIA whose custody of client assets arises solely from discretionary authority so long as (1) the client assets are maintained with a qualified custodian (e.g., securities not kept with a custodian pursuant to the “privately offered securities” exception would be disqualified from this exception) and (2) the RIA’s trading under discretionary authority is limited to client assets that settle exclusively on a delivery-versus-payment basis.

In the wake of recent digital asset firm collapses such as FTX, the SEC is scrambling to further ensure the safekeeping of all client assets and proposed Rule 223-1 aims to do just that in further enhancing investor protections. The proposed rule has a comment period of 60 days from release and will close on April 15, 2023. For more information, read the SEC’s official press release.

Keiter’s Financial Services Industry team is closely monitoring these and other possible regulation changes. We will keep you updated so you can plan accordingly. If you have any questions, please reach out to your Keiter Opportunity Advisor or Email | Call: 804.747.0000

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About the Author

Andrew K. Sledd

Andrew K. Sledd, CPA, CFE, Partner

​​Andrew specializes in auditing broker/dealers in securities, non-registered investment funds and registered investment advisers. He is a member of the Firm’s Financial Services Industry team and possesses a comprehensive understanding of SEC and FINRA rules and regulations. Read more of Andrew’s insights on our blog.

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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.


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