Document ID: SEC-2023-0940-0001
Agency: sec
Document Type: Proposed Rule
Title: Safeguarding Advisory Client Assets
Posted Date: 2023-08-30T04:00Z

[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 [www.gpo.gov]
[FR Doc No: 2023-18667]

=======================================================================
-----------------------------------------------------------------------

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.

-----------------------------------------------------------------------

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

     Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.htm); or
     Send an email to [email protected]. Please include 
File Number S7-04-23 on the subject line.

Paper Comments

     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 (https://www.sec.gov/rules/proposed.shtml). 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 www.sec.gov 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 [email protected], 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.
---------------------------------------------------------------------------

    \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'').
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.

---------------------------------------------------------------------------
    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