SEC Custody Rule 206(4)-2

The SEC Custody Rule, also identified as Rule 206(4)-2 within the Investment Advisers Act of 1940, sets forth regulations for investment advisers overseeing client funds or securities. Custody encompasses direct or indirect possession of client assets, authority to access them, or legal ownership through roles like a general partner or trustee.

Its primary objective is to protect client assets by mandating that they are held with a qualified custodian, shielding them from potential claims by the custodian or related entities. Proposed amendments seek to broaden the rule’s applicability, encompassing a wider array of assets such as digital currencies, physical assets, and liabilities on account balance sheets. These changes also propose stricter custody requirements and disclosures to bolster client protection.

Key provisions of the SEC Custody Rule include:

1. Qualified Custodian Requirement: Client assets must be held by a “qualified custodian,” typically a bank.
2. Asset Segregation: Advisers must maintain client assets in a custodial account separate from the custodian’s proprietary assets.
3. Written Agreements: Investment advisers must establish written agreements with qualified custodians, ensuring clients receive standard custodial protections and timely access to records and account statements.
4. Broader Definition of Custody: Discretionary trading authority is now considered part of custody, triggering additional safeguards to protect clients.
5. Expanded Asset Coverage: The rule extends coverage to various client assets beyond traditional funds and securities, including digital assets, physical properties, precious metals, and liabilities.
6. Enhanced SEC Disclosure: Advisers must provide additional information to the SEC regarding client custody arrangements through Form ADV.

These measures aim to fortify client protection and guarantee the security of client assets while under the management of investment advisers.

Related resources for investment advisers

Guide: Compliance Made Easy for RIAs and Broker-Dealers

Webinar: How to Supervise Your Suddenly-Remote Broker-Dealers & Investment Advisers

Checklist: RIA Compliance Checklist for Electronic Communications