In February 2023, the U.S. Securities and Exchange Commission published a proposal which, if adopted as proposed, would, among other things:

1. Recast the current custody rule (Rule 206(4)-2) as a rule adopted under Section 223 of the Investment Advisers Act of 1940, which was added in 2010 as part of the Dodd Frank Wall Street Reform and Consumer Protection Act;
2. Expand the requirements for safeguarding “funds and securities” in the current rule to safeguarding “funds, securities, or other positions held in a client’s account”, which draws in physical property, many non-securities such as CFTC-regulated swaps, loans and certain digital assets, as well as certain assets treated as liabilities, such as short sales;
3. Add a new presumption that having discretionary authority to trade client assets means an investment adviser has custody for purposes of the new safeguarding rule;
4. Require that, subject to two very limited exceptions for (i) mutual fund shares and (ii) privately offered securities and physical assets, a qualified custodian must maintain any client asset over with the adviser is deemed to have custody in the qualified custodian's “possession or control” (i.e., holding assets such that the qualified custodian is required to participate in any change in beneficial ownership of those assets, the qualified custodian’s participation would effectuate the transaction involved in the change in beneficial ownership, and the qualified custodian’s involvement is a condition precedent to the change in beneficial ownership);
5. Impose additional limitations on who would be considered a qualified custodian, especially for foreign financial institutions;
6. Require the investment adviser to enter into a written agreement with each qualified custodian (and reasonably believe it has been implemented), inlcuding specific provisions related to access to records, quarterly statements to clients/investors, internal control reports and the agreed upon level of investment adviser authority;
7. Require the investment adviser to obtain reasonable assurances from the custodian that the custodian will comply certain requirements, and the investment adviser must maintain an ongoing reasonable belief that the custodian is complying with these requirements, with respect to exercising due care in accordance with reasonable commercial standards in discharging its duty as custodian, indenmification and liability standards, liability for sub-advisers, segregation of client assets from the custodian's assets and prohibition of liens, charges and the like by the custodian or its related persons or creditors except as agreed by the client in writing;
8. Amend the related recordkeeping; and
9. Require revised reporting on Form ADV regarding custody relationships.

If adopted as proposed, large advisers would have 12 months and smaller advisers would have 18 months to comply.

If you would like to read more about the requirements under this proposal, you can access our full summary here.

This rule proposal was formally withdrawn by the SEC on June 12, 2025.  If the SEC wants to proceed with a rule in this area in the future, it will publish a new proposing release.

Please contact Jennifer Wood with any questions regarding this proposal.

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  Jennifer Wood

  Managing Director, Global Head of Asset Management Regulation & Sound Practices