Comment Period for SEC’s New Safeguarding Rule Expires Monday

The comment period for a Securities and Exchange Commission proposal to expand the type of investments subject to custodial oversight by advisers to things like physical commodities, digital assets and artwork is set to expire on Monday, May 8, though multiple industry associations are asking for a 60-day extension.

The SEC first proposed an amendment to the “custody rule” regarding adviser-led investing on February 15, citing the many advancements in technology, advisory services and custodial practices since the rule was last amended in 2009. The SEC’s proposal also changes the title of the “custody rule,” originally included in the Investment Advisers Act of 1940, to the “safeguarding rule.”

The new rule, as proposed, would expand its application beyond just securities and funds to all assets in a custodian’s custody. Physical commodities, real estate, artwork, short positions and digital assets would all be subject to the new rule. The SEC has explained that this understanding of the term asset is supposed to be “evergreen” so that the protections of the rule do not “depend on which type of assets the client entrusts to the adviser.”

With the amendment, advisers would be required to obtain certain written assurances from their custodians of investment items. These assurances would include confirmation: that the client’s assets are segregated so that they are protected in the case of bankruptcy; that the custodian will provide records to the SEC at their request; of the adviser’s authority to effect transactions; and that the custodian will have insurance to indemnify the client against losses due to the custodian’s recklessness.

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The rule would also clarify explicitly that if an adviser has the authority to trade a client’s assets on a discretionary basis, then that adviser is subject to the rule.

A joint comment letter signed by industry actors, including the ABA Securities Council, the American Bankers Association, the Investment Adviser Association, the Investment Company Institute and the Securities Industry and Financial Markets Association, requested an extension of the comment period for an additional 60 days from its initial February 15 filing. The organizations explained that in order to comment in a thorough manner, they must coordinate among various types of market constituents to understand the rule’s true effect.

The letter also argues that the overall pace of the SEC’s rulemaking justifies a longer comment period, which is a common complaint levied against the SEC under Chairman Gary Gensler.

The Office of the Attorney General for Massachusetts, under Andrea Joy Campbell, wrote in support of the proposal. She expressed concern about investors in digital assets, one of the primary motivations for the proposal, and approval for the rule’s ability to protect them. She explained that her office has seen a “sharp increase in consumer complaints related to cryptocurrency investments” in recent years. She elaborated that “consumers misperceived centralized exchanges such as FTX as stable custodians. This misconception cost Massachusetts consumers millions of dollars.”

Tags: custody, digital asset, SEC

Massachusetts Pension Reserves Investment Management, which manages the $95 billion pension for the state’s employees, has named Veena Ramani as director of stewardship, among other key hires.

Ramani, who began in the newly created role April 28 and reports to Deputy CIO David Gurtz, joins Mass PRIM from nonprofit research institute FCLTGlobal, where she was director of research. While at FCLTGlobal, Ramani oversaw the research team and worked with asset owners, asset managers and corporations to develop research intended to drive long-term value creation for investors.

Before joining FCLTGlobal, Ramani worked at sustainability nonprofit Ceres for nearly 15 years, holding several different roles. Her work included running campaigns to engage financial regulators on climate change risk; developing an online training curriculum for corporate board members on environmental, social and governance considerations; and engaging with large corporations on their sustainability and climate change strategies and disclosures.

Mass PRIM also hired Ethan Spencer as a senior investment officer on the pension fund’s portfolio completion strategies team. Spencer, who will report to team head Bill Li, was most recently managing partner at Eastern Point Capital. Prior to that, Spencer held positions at the Boston University Investment Office, Cambridge Associates and Credit Suisse First Boston.

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Additionally, the pension fund named Riya Shah to the newly created position of investment compliance analyst. Shah, who will report to Chief Investment Operating Officer Matt Liposky, will assist with investment manager guideline monitoring, regulatory and state filings, and operational due diligence. She joins Mass PRIM from State Street, where she was an enterprise technology risk analyst on the bank’s compliance team.

Finally, John Fitzpatrick was tapped to the newly created position of legal and governance analyst. Fitzpatrick, who will report to General Counsel Renee LeFevre, joins Mass PRIM from Boston-based law firm Laredo & Smith.