Mar 27, 2023 | News

SEC Brief: Proposed Amendment to Custody Rule 206(4)-2

The custody rule in place since 1962 under the Advisers Act has required registered investment advisers to safeguard client funds and securities in their possession where they were given authority to obtain possession of them.  The rule put in place was designed to protect assets from the from being misappropriated, misused, and protect from the adviser’s own potential insolvency.

The last time the Custody rule was updated was 2009.

Advances in technology, services, and custodial practices have increased the potential for clients assets to be placed at an increased risk since then.

The new rule, proposed as rule 223-1 under the Advisers Act (also know as the safeguarding rule).  The proposed new rule aligns the books and records rule and FORM ADV as well in order to improve the accuracy of custody-related data available to the public, SEC staff, and Commission.

The proposed amendments to the Custody rule expands the scope of the current rule beyond just client funds and securities to include any client assets of which the adviser has custody.  This change uses a more expansive language than that of Congress in empowering the Commission to develop rules to protect client assets in custody situations.  The term “assets” includes funds, securities, physical assets, and positions held in a client’s account.  The safeguarding rule would also include the adviser’s discretionary authority to trade client assets.

These assets must be maintained with a qualified custodian such as a federal or state-chartered bank or savings association, certain trust companies, a registered broker-dealer, a registered futures commission merchant, or certain foreign financial institutions.  The proposal further specifies the manner in which qualified custodian banks and savings associations must hold client assets.

Additional safeguarding rule protections include:

  • The RIA must enter into a written agreement with and obtain reasonable assurances from qualified custodians to ensure clients receive certain standard custodial protections when the adviser has custody of their assets. This is to ensure the client assets are properly segregated and held in accounts designed to protect the assets in the event of bankruptcy.
  • Modify the current custody rule’s exception from the obligation to maintain client assets with a qualified custodian for certain privately offered securities. This includes expanding the exception to include physical assets.
  • Retains the current custody rule’s requirement for the adviser to undergo a surprise examination by an independent CPA to verify client assets but also expands the audit provision as a means of satisfying the surprise exam requirement.
  • Amends the recordkeeping rule to require advisers to keep additional and more detailed records of trade and transaction activity and position information for each client account of which it has custody.
  • Form ADV will be amended to align the advisers’ reporting obligations with the proposed safeguarding rule’s requirements and to improve the accuracy of custody-related data available to the public, SEC staff, and the Commission.

The proposed amendment was released on February 15, 2023 and the comment period is open until May 8, 2023.


If your firm falls under these proposed rules you may be required to have a custody exam, or an annual audit, which the latter will not only satisfy the surprise custody exam requirement, it can be in the best interest of your clients to have your business scrutinized as the states and federal rules tend to change quickly.  We will keep you if and when these proposed amendments to the Custody Rule are adopted.


The details of the proposed rule can be found here:


Please contact our firm with any questions or if you are in need of a custody exam or an annual audit.