Joint Letter to SEC on Safeguarding Advisory Client Assets

Dear Ms. Countryman:

The American Bankers Association, ABA Securities Association, the Financial Services Forum, and the Bank Policy Institute (the "Signatories") appreciate the opportunity to provide comments to the Securities and Exchange Commission (the "Commission") on its proposed rule "Safeguarding Advisory Client Assets," published March 9, 2023 (the "Proposed Rule"). The Proposed Rule would significantly restructure, rework, and expand the current custody rule, including the key relationship between a registered investment adviser ("RIA") and a qualified custodian in relation to the assets of an RIA client, and the specific requirements that apply to qualified custodians that are banks.

The Signatories do not support the Proposed Rule and recommend that the Commission withdraw and re-propose it to more directly address specific instances where the current rule fails to ensure appropriate investor protection. The Proposed Rule suggests broad and complex changes that represent a fundamental departure from current industry practice, and, if finalized, would cause significant harm to investors and financial markets. Banks that provide custody services, or "custody banks," are among the most significant qualified custodians under the current rule, and play a critical, foundational role in the functioning of the global securities markets, ensuring broad operational efficiencies and high levels of investor protection. Custody banks have long offered safe, well-managed, and regulated custody services. The Commission has not identified any significant loss of traditional assets in custody that would warrant an extensive overhaul of the custody rules applicable to custody banks, as envisaged by the Proposed Rule. For reasons that are unclear, the Proposed Rule neither considers nor accommodates the bank custody model. In addition, the Proposed Rule does not articulate any deficiencies in the bank custody model that would warrant precluding clients of RIAs from utilizing custody banks absent the proposed changes to the operation of custody banks. And, as further described below, we believe the Proposed Rule's de facto regulation of custody bank operations and balance sheets exceeds the Commission's authority.

If, at a later date and with sufficient justification, the Commission resubmits for public review and comment an amended Proposed Rule that is more appropriately targeted to achieve the Commission's regulatory objectives, such an amended Proposed Rule (i) should not require banks to segregate client cash; (ii) should not hold custody banks liable for entities, such as central securities depositories ("CSDs"), or events, such as sub-custodian insolvency or force majeure, that are outside their control; (iii) should not require a custody bank to police RIAs' compliance with their investment mandates; (iv) should except or amend the custody requirement for asset classes that are impossible or infeasible to hold in custody; (v) should take into greater account any impacts the Proposed Rule would have on non-U.S. investments; (vi) should permit sensible, manageable, and comprehensive reporting; and (vii) should ensure it harmonizes with other regulatory requirements, such as those governing collective investment trusts ("CITs") and the Commission's own proposed rule on RIA outsourcing. Any final rule must also allow for sufficient time to implement it, with the timing appropriate to its breadth and complexity.

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