SEC Adopts Rule Changes To Reduce Risks, Proposes Other Changes
The SEC recently adopted rule changes to reduce the standard settlement cycle for most broker-dealer transactions in securities from two business days after the trade date to one to reduce risk. The Commission also proposed two other rule changes regarding the protection of advisory client assets and the Privacy Act.
Adopted Rule: Shortening the Securities Transaction Settlement Cycle
The SEC said the final rules are intended to improve the processing of institutional trades in addition to reducing the standard settlement cycle. They require a broker-dealer to enter into written agreements or establish, maintain and enforce written policies and procedures reasonably designed to ensure the completion of allocations, confirmations, and affirmations as soon as technologically practicable and no later than the end of trade date. The final rules require registered investment advisers to make and keep records of the allocations, confirmations and affirmations for certain securities transactions.
The rules also add a requirement to facilitate straight-through processing, which applies to certain clearing agencies that provide central matching services. Central matching service providers are required to establish, implement, maintain and enforce new policies and procedures reasonably designed to facilitate straight-through processing and submit an annual report to the SEC.
The final rules will become effective 60 days after publication in the Federal Register. The compliance date is May 28, 2024.
Proposed Rule: Safeguarding Advisory Client Assets
The SEC proposed rule changes to enhance protections of customer assets managed by registered investment advisers. The changes would amend and redesignate rule 206(4)-2, the SEC’s custody rule, under the Investment Advisers Act of 1940 and amend certain related recordkeeping and reporting obligations.
The proposed rules would exercise SEC authority under section 411 of the Dodd-Frank Act by broadening the application of the current investment adviser custody rule to include any client assets in an investment adviser’s possession or when an investment adviser has authority to obtain possession of client assets. Like the current rule, the proposal would entrust safekeeping of client assets to qualified custodians.
The SEC said the changes would help ensure qualified custodians provide standard custodial protections for an advisory client’s assets. The proposal would also improve protections for certain securities and physical assets that cannot be maintained by a qualified custodian. Additionally, the proposal would modify the current requirement for an adviser with custody of client assets to obtain a surprise examination from an independent public accountant to verify client assets to expand the availability of its use, enhance investor protection and facilitate compliance.
In addition, the proposal would update related recordkeeping requirements for advisers and amend Form ADV to align reporting obligations with the rule.
The comment period on the proposal will remain open for 60 days following publication in the Federal Register.
Proposed Rule: Revision to Privacy Act Rule
The SEC proposed a rule that would revise its regulations under the Privacy Act, the primary law governing the handling of personal information in the federal government.
The SEC’s Privacy Act rules were last updated in 2011. The proposal would codify current practices for processing requests made by the public under the Privacy Act to provide more clarity around the SEC’s process for how individuals can access information about themselves. Due to the scope of the revisions, the proposed rule would replace the SEC’s current Privacy Act regulations in their entirety.
Additionally, the proposal would revise procedural and fee provisions and eliminate unnecessary provisions. The proposal would also allow for electronic methods to verify one’s identity and submit Privacy Act requests.
The proposal is published on SEC.gov and will be published in the Federal Register. The comment period will remain open until Apr. 17, 2023, or until 30 days following publication in the Federal Register, whichever is later.