The Securities and Exchange Commission took more criticism yesterday from a coalition of 26 trade groups who argued in a letter to Chairman Gary Gensler that the agency’s “Safeguarding Client Advisory Assets” proposal would stymie the sales of annuities and a vast array of products and hurt markets.
The proposed rule will require advisors to maintain a new, extensive list of funds and securities, including annuities and crypto currencies, at a “qualified custodian” and to have a reasonable basis for believing that the custodian sends quarterly account statements to advisory clients.
The coalition, which includes the Financial Services Institute, Insured Retirement Institute and SIFMA, told Chair Gensler in a letter late Tuesday that the regulations would create actual barriers to best interest investment advice and sales with some products and create duplicative or nonworkable regulation for various financial services providers.
The SEC proposed the extensive new custody requirements in February, but was prompted to extend the public comment period in July due to an outpouring of industry criticism, which continued yesterday.
“We support the Commission’s goal of ensuring high levels of investor protection, including the safety of client assets from potential misuse or loss. However, in its current form, the proposal is in conflict with that goal as it will result in a myriad of negative impacts on investors including their access to various assets and markets with well-established rules and procedures,” the organizations wrote in a letter to SEC Chairman Gary Gensler.
“As such, we strongly urge the Commission not to adopt the proposal in its current form,” the coalition said.
Among the group’s issues are the fact that the SEC wants to require qualified custodians to segregate client assets, including cash deposits, margin and contractual obligations in a manner “that is at odds with the existing regulatory frameworks that cover the related institutions and instruments.”
The proposed rule would also create “an overly broad definition of ‘custody’ that includes many advisor practices that are already heavily regulated, resulting in unnecessary burden and inefficiency,” the group continue.
The broadening of the existing custody rule’s application from “funds and securities” to all positions held in a client account, including loans, derivatives, and other financial contracts held for investment purposes and physical assets, such as physical commodities, real estate, artwork, and precious metals, is also problematic, the group said.
Finally, the proposal would compel advisors to enter into contractual agreements with clients’ custodians, imposing on custodians a host of new commercial and operational requirements “that may be impossible to fulfill and will disrupt today’s system that works well,” the coalition concluded.
In a separate comment letter, the Insured Retirement Institute (IRI), said that the proposed rule would impair investors access to lifetime income products such as annuities, because currently insurance companies are not qualified custodians.
As a result, the SEC would frustrate “the ability of many investment advisers to provide advice in their clients’ best interests,” IRI said.
“These unfortunate outcomes could be avoided entirely through the adoption of an exception to the proposed rule’s qualified custodian requirement [to allow] insurance companies to act in lieu of a qualified custodian in connection with all contract types,” IRI told the regulator.
IRI says that providing an exception for insurance companies to act in lieu of a qualified custodian in connection with a contract would put insurance companies on equal footing with the mutual fund industry under the proposed rule.
“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.