Washington, DC, May 8, 2023 – SIFMA and SIFMA Asset Management Group (SIFMA AMG) today filed comment letters raising significant concerns with the Securities and Exchange Commission’s (SEC’s) proposed new rule for safeguarding advisory client assets.

Commenting on the proposal from the perspective of its custodial constituents, registered investment advisers and other sell-side constituents, SIFMA Deputy General Counsel Kevin Carroll noted:

“The proposal is a substantial departure from current industry practice and conflicts with numerous existing, well-functioning custodial regulatory frameworks already established by the SEC and other functional regulators.  The proposal would impose and shift substantial burdens and costs among advisers, their clients, and qualified custodians (QCs), but without demonstrating that any marginal improvement in asset protection would justify such burdens and costs. Unfortunately, it appears that the proposal’s biggest loser would be advisory clients due to fewer QCs to provide services, reduced access to markets and products, and higher advisory and custodial fees.”

SIFMA’s specific concerns, among others, include:

• The Proposal exceeds the SEC’s regulatory authority by imposing private contractual terms and other obligations on third-party QCs over whom the SEC does not have jurisdiction, expanding the scope of custody to include discretionary trading authority, expanding the definition of assets to include all assets (not just funds and securities), intruding on non-U.S. laws governing foreign custodians, and failing to perform a proper cost-benefit analysis of the Proposal’s cumulative or interactive effects.
• The Proposal undermines sound bank custody of cash deposit accounts and will result in higher costs for investors. The requirement to segregate advisory client cash would fundamentally alter the custody bank model, increase the cost and complexity of providing custody services to institutional investors, increase operational and settlement risk for investors, significantly impact the funding and liquidity management of a number of custody banks, and result in negative consequences for the orderly operation of financial markets and the cost of services to clients.
• The segregation requirement prevents effective collateral management and beneficial prime brokerage practices, which in turns harms essential market functions and existing well-functioning custodial practices at banks and prime brokers.
• The Proposal adversely affects various asset classes, including loans and various other securitized products, repurchase agreements and reverse repurchase agreements, derivatives including swaps, and annuities. These instruments would be adversely impacted because they could not meet the segregation of assets, possession or control, self-custody and/or other requirements of the Proposal.
• The QC liability and related provisions adversely affect custodial arrangements, resulting in reduced services, reduced market access, and higher costs to clients.
• The potential need for QCs to ensure instructions received from advisers are consistent with their authority is outside the role of a QC as a directed agent, operationally impractical, increases settlement risk, and creates a moral hazard at the expense of clients.
• The Proposal adversely affects adviser custody practices to the detriment of clients because:
  • The written agreement requirement is unworkable. As a result, advisers and custodians would likely reduce services and pass along higher costs to clients.
  • The written assurance requirement is unworkable and would increase costs to, and may not be in the best interest of, the client.
  • Advisers would likely decline discretionary authority for certain assets. In turn, clients would be forced to self-direct in these assets and thus would be deprived of their adviser’s advice, guidance, and management services.
  • Privately offered securities could not satisfy the Proposal’s requirements. Advisers likely could not demonstrate or document this condition.
• The Proposal should be amended to allow QCs to provide digital asset safekeeping services to their clients.

“We recommend that the SEC withdraw the Proposal until such time as it has fully considered and can explicitly address the critical legal, regulatory, policy and practical concerns raised in this letter,” Carroll concluded in the SIFMA letter.

In the letter representing SIFMA AMG’s registered investment adviser members, SIFMA AMG Managing Director Kevin Ehrlich raised similar concerns, noting:

“SIFMA AMG supports the Commission’s principal aim of preventing loss, misuse, and misappropriation of client assets.  However, we have serious concerns about the breadth and consequences of the proposal and urge the Commission not to adopt the proposal in its current form.  Given the immense impact any mandated change to current custodial practices will have on advisers, their clients, qualified custodians, and the market at large, the Commission should consider withdrawing the proposal and engaging in a market-wide analysis and discourse that is otherwise infeasible in the constraints of the proposal and comment period.”

The letter details the following concerns:

• Disrupting well-functioning markets and practices is unwarranted and investors will be adversely impacted.
• Obtaining contractual assurances from QCs and injecting advisers into contractual relationships between clients and their custodians is practically inefficient and unworkable.
• Congressional authority does not contemplate overhauling traditional concepts of adviser custody.
• The cost-benefit analysis does not fully contemplate initial and ongoing costs.

SIFMA AMG’s comment letter raises similar and consistent concerns to the SIFMA letter with respect to advisers and adviser custody practices.

The full letters can be found here:

• SIFMA letter
• SIFMA AMG letter

-30-

SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s nearly 1 million employees, we advocate on legislation, regulation and business policy, affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org.

SIFMA’s Asset Management Group (SIFMA AMG) brings the asset management community together to provide views on U.S. and global policy and to create industry best practices. SIFMA AMG’s members represent U.S. and global asset management firms – both independent and broker-dealer affiliated – whose combined assets under management exceed $62 trillion. The clients of SIFMA AMG member firms include, among others, tens of millions of individual investors, registered investment companies, endowments, public and private pension funds, UCITS and private funds such as hedge funds and private equity funds.