October 30, 2023
Submitted electronically via SEC.gov
Ms. Vanessa A. Countryman
US Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090
Re: File Number S7-04-23; Release No. IA-6240; Safeguarding Advisory Client Assets (the “Proposal”)1
Dear Ms. Countryman:
The Securities Industry and Financial Markets Association (“SIFMA”) and SIFMA’s Asset Management Group ( “SIFMA AMG”)2 appreciate the opportunity to provide further comments to the Securities and Exchange Commission (the “Commission”) on the Proposal. This letter supplements the letters previously submitted by SIFMA and SIFMA AMG on May 8, 2023 (the “Initial Comment Letters”).
As stated in the Initial Comment Letters, we support the Commission’s principal aim of preventing loss, misuse, and misappropriation of client assets. However, the Proposal raises significant concerns, including with respect to the interaction between the Proposal and the multitude of other rulemakings, guidance, and interpretations. As discussed in detail below, SIFMA and SIFMA AMG draw from and expound upon certain points made in the Initial Comment Letters, as well as introduces new observations made in light of continued discussions with our members and industry participants, as well as conversations with the Commission.
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. In addition to the issues previously submitted for the Commission’s consideration, we are concerned that critical aspects of the Proposal conflict with existing market structures and regulations, are inconsistent with the existing roles and responsibilities of market participants and would adversely impact investors.
Ultimately, if not significantly revised and subjected to additional review and comment, we believe that the Proposal likely would (i) significantly disrupt the operation of financial markets, (ii) restrict the ability of advisers to provide clients with investment advice for certain asset classes, (iii) limit the availability of custodial services, (iv) increase costs borne by investors, (v) result in fewer custodians for clients and advisers from which to choose, and (vi) negate the efforts and considerations taken in previous guidance issued by the Commission.
We believe that the Commission can accomplish its regulatory and policy objectives without the imposition of a one-size-fits-all rule that does not fully account for market realities. The Proposal should not be adopted as proposed.
I. The Specific Problem the Proposal Attempts to Address and Solve For Remains Unclear.
The Proposal’s purpose and intended application remain elusive. It conflicts with many existing market structures and well-functioning industry practices, and is a superfluous regulatory layering, considering existing Commission guidance.
II. The Proposal’s Attempt to Reconceptualize Existing Terminology in the Advisers Act is Inconsistent with Existing Roles and Responsibilities of Market Participants.
The Proposal should not reconceptualize “maintain” in the context of the qualified custodian requirement. The Commission’s efforts to reconceptualize “maintain” to mean “possession or control” is a material change with adverse consequences for market participants.
III. The Proposal Creates Custody Risk in its Failure to Adequately Distinguish Among Custody Risk, Counterparty Risk, and Investment Risk.
The Proposal does not adequately distinguish among custody risk, counterparty risk, and investment risk. The result would be a new regulation that will curb the ability of investors to access investment advice for certain asset classes and either limit custody services offered by advisers or materially increase the cost of such services.
1 Safeguarding Advisory Client Assets, SEC Release No. IA-6240 (Mar. 9, 2023) (“Proposal”).
2 SIFMA is the leading trade association for broker-dealers, investment banks, and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s nearly one million employees, we advocate on legislation, regulation, and business policy affecting retail and institutional investors, equity and fixed income markets, and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (the “GFMA”).
SIFMA AMG brings the asset management community together to provide views on U.S. and global policy and to create industry best practices. SIFMA AMG’s members represent U.S. and global asset management firms whose combined assets under management exceed $45 trillion. The clients of SIFMA AMG member firms include, among others, tens of millions of individual investors, registered investment companies, endowments, public and private pension funds, UCITS, and private funds such as hedge funds and private equity funds. For more information, visit http://www.sifma.org/amg. SIFMA and SIFMA AMG appreciate the assistance of Jay Baris, Kenny Terrero, Chuck Daly, Victoria Anglin and Margaret Tomasik of Sidley Austin LLP in the preparation of this response.