The compliance burden and potential liabilities associated with the Securities and Exchange Commission’s proposed new custody rule may cause qualified custodians to exit the business, and would hit small advisors particularly hard, according to Valerie Mirko, partner at Armstrong Teasdale in Washington.
The SEC proposed a new rule on Feb. 15 under the Investment Advisers Act of 1940 to address how RIAs safeguard client assets.
Mirko, former general counsel for the North American Securities Administrators Association, recently joined Armstrong Teasdale’s Washington office as co-leader of the Securities Regulation and Litigation practice from Baker McKenzie’s Washington office.
She represents broker-dealers, asset managers — including retail and wealth management firms — and private fund advisors in enforcement and regulatory matters.
We caught up with Mirko to talk about the controversial new custody rule and other compliance issues advisors are grappling with now.
THINKADVISOR: Is the proposed new SEC Safeguarding Rule a compliance nightmare? Are there aspects of the plan that you agree with?
Valerie Mirko: Before we can talk about whether it is a compliance nightmare, we need to talk about the workability of this proposal, should it be adopted, and whether a final version would survive litigation.
The proposal fundamentally changes the relationship between investment advisers and qualified custodians, but not all qualified custodians are subject to SEC oversight and jurisdiction.
For example, qualified custodians who are broker-dealers are subject to SEC oversight, but banks are not.
Yet, the proposal contemplates contractual requirements between advisers and their qualified custodians, irrespective of the type of qualified custodian or the SEC’s lack of jurisdiction over certain qualified custodians.
I expect advisers to object strongly to the proposal, but I also expect that custodians and other service providers will object in this proposal’s comment process.
I think we should be prepared for at least a segment — and likely a sizeable one — of the current service providers serving as qualified custodians will exit the business in light of the proposal, particularly if the proposal is adopted without material changes.
Without material changes to the proposal, a final rule would entail updating and repapering all the custodian relationships for the majority of the 15,000 SEC-registered investment advisers — essentially all advisers who provide any kind of portfolio management.