The SEC Safeguarding Rule (Rule 206(4)-2 under the Investment Advisers Act of 1940, including proposed amendments) mandates registered investment advisers to maintain client funds and securities with a qualified custodian. This regulation is designed to protect investor assets from an adviser’s insolvency, misuse, or operational failures.
Mechanism
The rule functions by requiring investment advisers to place client assets, including certain digital assets deemed “securities,” with institutions like banks, broker-dealers, or specific trust companies that meet stringent financial and operational criteria. This involves written agreements, independent verification of assets, and periodic account statements directly to clients, ensuring asset segregation and preventing commingling.
Methodology
The methodology for adherence involves rigorous due diligence on qualified custodians, establishing clear contractual terms for asset custody, and implementing internal controls for record-keeping and reconciliation. This systematic approach ensures robust investor protection by minimizing the risk of asset loss and enhancing transparency regarding asset ownership and location.
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