Proposed Rule2023-18667
Safeguarding Advisory Client Assets; Reopening of Comment Period
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
August 30, 2023
Effective
March 9, 2023
Issuing agencies
Securities and Exchange Commission
Abstract
The Securities and Exchange Commission ("Commission") is reopening the comment period for its proposal, Safeguarding Advisory Client Assets, Release No. IA-6240 (Feb. 15, 2023) ("Proposal"), which proposed a new rule under the Investment Advisers Act of 1940 ("Advisers Act" or "Act") that would redesignate and amend the current custody rule. In light of the adoption of the private fund adviser audit rule, which generally requires a registered investment adviser to obtain an annual financial statement audit of each private fund it advises in accordance with the audit provision of the current custody rule, reopening the comment period will allow interested persons additional time to assess the proposed amendments to the current custody rule's audit provision in light of the private fund adviser audit rule.
Full Text
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<title>Federal Register, Volume 88 Issue 167 (Wednesday, August 30, 2023)</title>
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[Federal Register Volume 88, Number 167 (Wednesday, August 30, 2023)]
[Proposed Rules]
[Pages 59818-59820]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-18667]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 275 and 279
[Release No. IA-6384; File No. S7-04-23]
RIN 3235-AM32
Safeguarding Advisory Client Assets; Reopening of Comment Period
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule; reopening of comment period.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
reopening the comment period for its proposal, Safeguarding Advisory
Client Assets, Release No. IA-6240 (Feb. 15, 2023) (``Proposal''),
which proposed a new rule under the Investment Advisers Act of 1940
(``Advisers Act'' or ``Act'') that would redesignate and amend the
current custody rule. In light of the adoption of the private fund
adviser audit rule, which generally requires a registered investment
adviser to obtain an annual financial statement audit of each private
fund it advises in accordance with the audit provision of the current
custody rule, reopening the comment period will allow interested
persons additional time to assess the proposed amendments to the
current custody rule's audit provision in light of the private fund
adviser audit rule.
DATES: The comment period for the proposed rule published in the
Federal Register on March 9, 2023, at 88 FR
[[Page 59819]]
14672, is reopened. Comments should be received on or before October
30, 2023.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/submitcomments.htm">https://www.sec.gov/rules/submitcomments.htm</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#7b090e171e56181416161e150f083b081e18551c140d"><span class="__cf_email__" data-cfemail="c5b7b0a9a0e8a6aaa8a8a0abb1b685b6a0a6eba2aab3">[email protected]</span></a>. Please include
File Number S7-04-23 on the subject line.
Paper Comments
<bullet> Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number S7-04-23. The file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method of submission. The Commission will post all
comments on the Commission's website (<a href="https://www.sec.gov/rules/proposed.shtml">https://www.sec.gov/rules/proposed.shtml</a>). Comments also are available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Operating conditions may limit access to the
Commission's Public Reference Room. Do not include personal
identifiable information in submissions; you should submit only
information that you wish to make available publicly. We may redact in
part or withhold entirely from publication submitted material that is
obscene or subject to copyright protection.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at <a href="http://www.sec.gov">www.sec.gov</a> to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Janet Jun, Senior Counsel; Christopher
Staley, Branch Chief; or Melissa Roverts Harke, Assistant Director,
Investment Adviser Regulation Office, Division of Investment
Management, (202) 551-6787 or <a href="/cdn-cgi/l/email-protection#8ac3cbf8ffe6eff9caf9efe9a4ede5fc"><span class="__cf_email__" data-cfemail="723b3300071e1701320117115c151d04">[email protected]</span></a>, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549.
SUPPLEMENTARY INFORMATION:
I. Background
The Commission proposed 17 CFR 275.223-1 under the Advisers Act
(``rule 223-1'' or ``safeguarding rule'') on February 15, 2023, to
address how advisers safeguard client assets and enhance investor
protections.\1\ The Proposal also would renumber 17 CFR 275.206(4)-2
(``rule 206(4)-2'' or ``current custody rule'') to redesignate it as
rule 223-1 and amend certain of its provisions, including 17 CFR
275.206(4)-2(b)(4) (``rule 206(4)-2(b)(4)'' or ``audit provision'').
The original comment period for the Proposal closed on May 8, 2023.
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\1\ See Safeguarding Advisory Client Assets, Investment Advisers
Act Release No. 6240 (Feb. 15, 2023), [88 FR 14672 (Mar. 9, 2023)]
(``Safeguarding Advisory Client Assets Release'').
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Title 17 section 275.206(4)-2(a)(4) of the current custody rule
requires the client funds and securities of which an adviser has
custody to be verified by actual examination at least once during each
calendar year by an independent public accountant. An adviser is deemed
to have complied with this annual surprise examination requirement with
respect to the accounts of certain pooled investment vehicles,\2\
provided that such vehicles' audited financial statements are obtained
and delivered in accordance with the elements of the current custody
rule's audit provision, as set forth in paragraphs (b)(4)(i) through
(b)(4)(iii) of the current custody rule. Similar to the current custody
rule, the proposed safeguarding rule generally would require an adviser
with custody of client assets \3\ to obtain a similar annual surprise
examination. Again, like the current custody rule, the proposed
safeguarding rule also contains an audit provision that, when
satisfied, would allow an adviser to be deemed in compliance with the
proposed safeguarding rule's surprise examination requirement with
respect to certain client accounts.\4\
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\2\ As discussed below, the safeguarding rule would expand the
availability of the audit provision from pooled investment vehicle
clients to any advisory client entity whose financial statements are
able to be audited in accordance with the rule. See proposed 17 CFR
275.223-1(b)(4) (``rule 223-1(b)(4)'').
\3\ The safeguarding rule would expand the scope of the current
custody rule's application to cover not only client funds and
securities, but also client ``assets'', which is defined in the
proposed safeguarding rule as, ``funds, securities, or other
positions held in the client's account.'' See proposed 17 CFR
275.223-1(d)(1).
\4\ See proposed rule 223-1(b)(4). See also Safeguarding
Advisory Client Assets Release, supra footnote 1, at section
II.G.1.a. (explaining the elements of the audit provision under the
proposed safeguarding rule).
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While the elements of the proposed safeguarding rule's audit
provision remain largely unchanged from those of the current custody
rule, the Proposal includes some key modifications; namely, (1)
expanding the audit provision's availability from ``pooled investment
vehicle'' clients to ``any other entity''; (2) requiring the audited
financial statements of non-U.S. clients to contain information
substantially similar to statements prepared in accordance with U.S.
GAAP and material differences with U.S. GAAP to be reconciled; and (3)
requiring that the adviser or the entity enter into a written agreement
with the auditor requiring the auditor to notify the Commission in the
event of the auditor's termination or issuance of a modified
opinion.\5\
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\5\ Compare rule 206(4)-2(b)(4) with proposed rule 223-1(b)(4).
See also Safeguarding Advisory Client Assets Release, supra footnote
1, at section II.G.1.a.
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On August 23, 2023, the Commission adopted new rules designed to
protect investors who invest in private funds.\6\ Among them was 17 CFR
275.206(4)-10 under the Act (``rule 206(4)-10'' or ``private fund
adviser audit rule''), which generally requires a registered investment
adviser to cause each of the private funds it advises (other than a
securitized asset fund, as defined in 17 CFR 275.211(h)(1)-1
(``securitized asset fund'')) to undergo a financial statement audit
(as defined in 17 CFR 210.1-02(d)) that satisfies the requirements set
forth in paragraph (b)(4) of the current custody rule, as well as to
deliver each such audited financial statement in accordance with
paragraph (c) of the current custody rule.\7\
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\6\ See Private Fund Advisers; Documentation of Registered
Investment Adviser Compliance Reviews, Investment Advisers Act
Release No. 6383 (Aug. 23, 2023).
\7\ Title 17 section 275.206(4)-10(b) also references the
current custody rule's audit provision, providing an exception from
the requirement to obtain an audit for funds and advisers that are
not in a control relationship, and instead requiring an adviser to
take ``all reasonable steps'' to cause the private fund (other than
a securitized asset fund) to undergo a financial statement audit
that satisfies the requirements set forth in paragraph (b)(4) of the
current custody rule and to deliver audited financial statements in
accordance with paragraph (c) of the current custody rule.
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II. Reopening of Comment Period
Because compliance with the private fund adviser audit rule is
predicated in part on an adviser complying with the current custody
rule's audit provision, the proposed modifications to the audit
provision as set forth in the proposed safeguarding rule, if adopted,
would apply to advisers subject to the private fund adviser audit
rule.\8\ The
[[Page 59820]]
Commission is therefore reopening the comment period for the
safeguarding rule proposal so that commenters may consider the proposed
modifications to the audit provision in light of rule 206(4)-10. The
Commission is reopening the comment period for Release No. IA-6240
Safeguarding Advisory Client Assets until October 30, 2023.
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\8\ If the Commission adopts the proposed safeguarding rule, the
Commission could amend rule 206(4)-10 at that time to redesignate
references to rule 206(4)-2 in rule 206(4)-10 as references to rule
223-1.
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By the Commission.
Dated: August 23, 2023.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2023-18667 Filed 8-29-23; 8:45 am]
BILLING CODE 8011-01-P
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