A group of banking and financial services organizations have taken issue with a rule proposed by the Securities and Exchange Commission (SEC) that would expand the reach of the custody rule.
The proposed rule, called Safeguarding Advisory Client Assets, would expand the reach of the custody rule beyond client funds and securities. Instead, it would include all “funds, securities, or other positions held in a client’s accounts,” including crypto assets, that an investment adviser has custody of. Among other provisions, it would also expand the definition of custody to include additional authorities and require advisers with custody of client assets to segregate those assets and not commingling them with other assets.
The groups- the American Bankers Association (ABA), ABA Securities Association, the Financial Services Forum, and the Bank Policy Institute – say this would harm investors and financial markets. They also said it would exceed the SEC’s regulatory authority.
“The Proposed Rule suggests broad and complex changes that represent a fundamental departure from current industry practice, and, if finalized, would cause significant harm to investors and financial markets,” the groups wrote in a comment letter to the SEC. “Banks that provide custody services, or ‘custody banks,’ are among the most significant qualified custodians under the current rule and play a critical, foundational role in the functioning of the global securities markets, ensuring broad operational efficiencies and high levels of investor protection. Custody banks have long offered safe, well-managed, and regulated custody services. The Commission has not identified any significant loss of traditional assets in custody that would warrant an extensive overhaul of the custody rules applicable to custody banks, as envisaged by the Proposed Rule. For reasons that are unclear, the Proposed Rule neither considers nor accommodates the bank custody model.”
In addition, they say the proposal inserts the SEC into matters at the core of the bank regulatory system and conflicts with priorities in maintaining the safety and soundness of the banking sector.
“The Proposed Rule is an unwarranted intrusion on matters properly left to the bank regulators,” they wrote.
Among other areas of concern, they say the proposal shifts legal liability to custody banks, holding them accountable for actions beyond their control. They added that the requirement for custodians to monitor registered investment advisor authority to effect transactions will reduce market efficiency, create settlement failures, work against T+1 settlement, and increase costs for investors.
Further, they raised concerns about how a custody bank would provide custody and segregation of assets with respect to assets that are not cash or securities.
“The Proposed Rule would have a very detrimental effect on efficiency, capital formation, and competition because it would impose enormous costs on custody banks, registered investment advisors, and investors without a corresponding and offsetting benefit in risk reduction,” the associations concluded. “The economic analysis provided by the Commission fails to account for such costs and thereby fails to employ the well-reasoned decision-making required by the Administrative Procedure Act.”