ABA, FSF, BPI: Proposed SEC Rule Would Harm Investors, Financial Markets

Washington, D.C. — The Securities and Exchange Commission’s proposed rule “Safeguarding Advisory Client Assets” would significantly harm investors and financial markets and exceeds the Commission’s regulatory authority, according to a new comment letter filed today by the American Bankers Association, ABA Securities Association, the Financial Services Forum, and the Bank Policy Institute. The associations urge the Commission to withdraw and resubmit a proposal that is better targeted to the Commission’s objectives.

“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,” the groups wrote. “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.”

The groups also strongly believe the Proposed Rule’s effective regulation of custody bank operations and balance sheets exceeds the Commission’s authority.

“The Proposed Rule inserts the Commission into matters at the core of the bank regulatory system and conflicts with well-established priorities in maintaining the safety and soundness of the banking sector,” the associations wrote. “The Proposed Rule is an unwarranted intrusion on matters properly left to the bank regulators.”

The groups also note other areas of concern, which are explained in depth in the detailed letter:

  • The treatment of cash deposits in the Proposed Rule is unworkable in practice and, where technically possible, impractical, highly inefficient, and costly to market participants.
  • The Proposed Rule shifts legal liability to custody banks, holding them accountable for actions well beyond their control.
  • The Proposed Rule’s requirement for custodians to monitor registered investment advisor authority to effect transactions will reduce market efficiency, create settlement failures, work against T+1 settlement, and increase costs for investors.
  • The Proposed Rule raises significant questions as to how a custody bank would provide custody and segregation of assets with respect to assets that are not cash or securities.
  • The Commission’s economic analysis is incomplete and inadequate, failing to account for numerous significant costs to custody banks and their customers.

“The Proposed Rule would have a very detrimental effect on efficiency, capital formation, and competition because it would impose enormous costs on custody banks, registered investment advisors, and investors without a corresponding and offsetting benefit in risk reduction,” the associations conclude. “The economic analysis provided by the Commission fails to account for such costs and thereby fails to employ the well-reasoned decision-making required by the Administrative Procedure Act.” 


About Bank Policy Institute.

The Bank Policy Institute (BPI) is a nonpartisan public policy, research and advocacy group, representing the nation’s leading banks and their customers. Our members include universal banks, regional banks and the major foreign banks doing business in the United States. Collectively, they employ almost 2 million Americans, make nearly half of the nation’s small business loans, and are an engine for financial innovation and economic growth.

About the American Bankers Association.

The American Bankers Association is the voice of the nation’s $23.6 trillion banking industry, which is composed of small, regional and large banks that together employ more than 2 million people, safeguard $19.2 trillion in deposits and extend $12.2 trillion in loans.

About the ABA Securities Association.

The ABA Securities Association (ABASA) is a separately chartered trade association and non-profit subsidiary of the American Bankers Association whose mission is to represent the interests of banks underwriting and dealing in securities, proprietary mutual funds and derivatives before Congress and the federal government. ABASA members are large financial institutions with significant capital markets businesses.

About the Financial Services Forum

The Financial Services Forum is an economic policy and advocacy organization whose members are the chief executive officers of the eight largest and most diversified financial institutions headquartered in the United States. Forum member institutions are a leading source of lending and investment in the United States and serve millions of consumers, businesses, investors, and communities throughout the country. The Forum promotes policies that support savings and investment, deep and liquid capital markets, a competitive global marketplace, and a sound financial system.

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