IRI and ICI Voice Disapproval on Proposed SEC Custody Rule

SEC IRI ICI

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Two industry giants are speaking out against the Securities and Exchange Commission’s (SEC) proposal to barricade annuity access for registered investment advisor (RIA) clients.

The Insured Retirement Institute (IRI) and the Investment Company Institute (ICI) each issued comment letters voicing disapproval of the SEC’s proposed Safeguarding Advisory Client Assets rule, which would broaden the application of the current investment advisor custody rule beyond client funds and securities to include any client assets in an investment adviser’s possession or when an adviser has the authority to obtain possession of client assets.

In its comment letter, ICI claimed that the SEC proposal adds new responsibilities to advisers and custodians without improving the protection of client assets. “For the first time, the SEC would equate an adviser’s discretionary trading authority over client accounts with having custody of those assets,” ICI said. “This could result in advisers being deemed to have custody over thousands of additional client accounts despite there being no change in the adviser’s relationship with the client.”

“Further, the SEC would seek to impose new requirements on custodians, such as banks and futures commission merchants who are outside of the SEC’s regulatory perimeter, by using its authority over advisers,” added ICI. “Such a tactic places advisers in an untenable situation.”

In written comments, IRI said the regulation would “impair access” to products that provide lifetime income, thereby challenging investment advisers who try to provide advice in their client’s best interest.

Additionally, under the proposed rule, since insurance companies own underlying contract assets for annuities they issue—with companies subject to strict state insurance regulations and federal regulations that protect consumers—adding an exception for insurance groups to act instead of a qualified custodian in connection with a contract would put insurance companies on equal footing with the mutual fund industry, said IRI.

“The SEC’s acknowledgment of the similarities between insurance companies and mutual fund transfer agents in the custody context necessitates consideration by the SEC as to why the two receive disparate treatment under the proposed rule – with insurance companies relying on limited no-action guidance from the staff and mutual fund transfer agents being granted a specific exception by the SEC in the custody rule,” IRI wrote.

Instead, IRI called on the SEC to alter its proposal by including an “exemption to the proposed rule’s qualified custodian requirement that effectively modernizes current SEC guidance that allows insurance companies to act in lieu of a qualified custodian in connection with all contract types.”

Meanwhile, ICI connected the proposed rule to regulation dating back to 1997, when the SEC had foreign custodians insure fund assets against the risk of loss. When custodians refused to cooperate, the SEC reversed the rule in 2000.

“The proposed rule would be tremendously costly and, in some cases, practically impossible to implement,” said ICI. “It would do little to improve the protection of client assets, which logically should be the goal of any major new rulemaking in this important area.”

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