The Dodd-Frank Underpinnings of the Securities and Exchange Commission’s Safeguarding Proposal

Status Quo Rather than an Expanded Mandate

Introduction and Background:

Over a year has passed since the Securities and Exchange Commission (“SEC” or “Commission”) proposed Rule 223-1 (the “Proposal” or the “Safeguarding Rule”).

The Proposal, if adopted, would amend and redesignate current Rule 206(4)-2 of the Investment Advisers Act of 1940, as amended (the “Advisers Act”), to new Rule 223-1 entitled “safeguarding client assets” and impose a wide range of new requirements on registered investment advisers. The Proposal would also impact a wide range of other market participants, including clients, custodians, and broker-dealers. In comment letters to the Commission, SIFMA and the Asset Management Group of SIFMA and others provided extensive feedback.

The Proposal relies heavily on authority the Commission references in the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) and decades of adviser regulation by the Commission. However, neither mandate or warrant the overhaul of adviser custody.

Executive Summary:

The Proposal is inconsistent with Dodd-Frank statutory authority and historical precedent for adviser custody regulation in four significant ways:

• • The legislative history of Dodd-Frank shows that Section 411 was not a mandate or grant of authority to overhaul adviser custody regulation, but instead was a codification of measures the Commission took in 2009.

• • The legislative history of Section 411 shows that there was no Congressional intent to expand the scope of adviser custody beyond “funds and securities” and, therefore, the Commission’s intent to
    regulate such “assets” exceeds its statutory authority.

• • Deeming advisers with discretionary trading authority to have “custody” for purposes of the Advisers Act has no legislative foundation and is contrary to over 80 years of investment adviser regulation.

• • The Proposal’s written agreement and reasonable assurances requirements exceed the Commission’s rulemaking authority under the Advisers Act and Dodd-Frank.