I am pleased to support today’s proposal relating to amendments to the Custody Rule, or the newly minted “Safeguarding Advisory Client Assets” Rule.[1]

The Custody Rule from inception acknowledged that, when clients entrust their funds and securities to their investment advisers, those advisers must hold such assets in safekeeping, so that they are “insulated from and not [] jeopardized by financial reverses, including insolvency, of the investment adviser.”[2] In fact, it is considered a fraudulent, deceptive or manipulative practice to do otherwise. That was true at inception and it remains true today.[3] This premise is foundational to the relationship between adviser and client.

When most recently amending the Custody Rule in 2009, the Commission cited to wrongdoing on the part of advisers involving misappropriation or misuse of investor assets.[4] The Custody Rule, however, is also an unsung hero of the frauds that were never perpetrated because of the rule’s protections. Those protections are stalwart as the SEC continues to strengthen the rule,[5] enforce its mandates,[6] and rigorously examine adviser compliance.[7] Indeed, the Custody Rule is the rule that, when properly executed, helps prevent fraud, protect investors against the guiles and vagaries of a misguided or fraudulent adviser, and promote confidence in the integrity of the client - adviser relationship.[8]

Today’s proposed rule expands and fortifies the safeguards under the existing Custody Rule in a number of important ways. For example:

• Assets. The proposal uses our Dodd-Frank authority to apply the protections of the rule to all client assets over which an investment adviser has custody, and not just “funds or securities” as is the language in the current rule.[9] This would potentially capture certain alternative assets, for which advisers provide investment advice but are not considered securities.[10]^,[11] The expansion of the rule to cover all assets ensures that new or novel assets will get adequate protection as they arise, regardless of whether such assets are funds or securities.[12] An adviser’s fiduciary duty applies to the entire relationship with the client, not just with respect to funds or securities. This proposal would help bring the safeguarding of assets in line with that fiduciary obligation.
   
• Privately Offered Securities. The proposal would also enhance investor protections under, and circumscribe the availability of,[13] the “privately offered securities” exception, where advisers are not required to custody assets with a qualified custodian.[14] While this exception was intended to be utilized infrequently, the exception appears to be widely relied upon throughout the industry.[15] Today’s proposal would mandate that advisers who rely on the privately offered security exception have a reasonable belief that such securities cannot be maintained with a qualified custodian; such assets are nonetheless safeguarded and independently verified annually and upon transfer, purchase or sale.
   
• Safeguards Surrounding Qualified Custodianship. The proposal also improves the gatekeeping function provided by qualified custodians.[16] For example, an adviser would have to enter into a written agreement with the qualified custodian to ensure that certain basic fundamental custodial protections are in place. The qualified custodian would also have to obtain a written internal control report that includes an opinion of an independent public accountant regarding the adequacy of its controls. And, the adviser would have to get certain assurances in writing from the qualified custodian, including assurances that the custodian will not subject client assets to any lien or claim by the custodian or its creditors unless expressly authorized in writing by the client (a prohibition that would also be true of an investment advisor and its creditors under the proposal).[17]

Finally, a word about the application of the rule to cryptocurrencies and digital assets. The proposal lays out how advisers can ensure that crypto assets are adequately custodied. Many in the industry have asked how our rules apply to crypto and this proposal is explicit on that point. Under the current crypto landscape, with a glaring lack of registered offerings, registered participants, transparency and accountability, investors’ crypto assets remain particularly vulnerable to misuse, misappropriation and fraud. And restoring or recovering assets that have dissipated presents potentially insurmountable challenges.[18] While the Custody Rule today in fact covers many crypto asset securities, I share the concerns in the release that many of those assets are not in practice properly custodied or safeguarded, and events across the crypto markets have shown the spectacular harm and loss that can befall investors when client assets are not adequately safeguarded.

Today’s proposed amendments apply to all assets over which an investment adviser has custody. It does not favor or discourage one asset class over another. It allows for innovation and new technologies, but not at the expense of basic, fundamental investor protection. No matter how bold or different the investment landscape may look in the future, the Custody Rule must stand unweathered as the promise that investor assets are safeguarded against misuse and misappropriation. Today’s proposal seeks to strengthen that promise. For these reasons, and many more, I’m pleased to support today’s proposed rule.

This release, I know, has been a tremendous undertaking for our teams in the Division of Investment Management, Division of Economic and Risk Analysis, the General Counsel’s office, the Division of Examinations, the Division of Enforcement, the Office of International Affairs, the Office of the Strategic Hub for Innovation and Financial Technology, and in the offices of the Chair and my fellow Commissioners. Thank you as always for your hard work, rigor and careful consideration.