SEC's Proposed Safeguarding Rule: Concerns About the Scope and Specific Items for Closed-End Fund Managers to Monitor

Kelley Howes spoke to the Private Equity Law Report about the Securities and Exchange Commission's (SEC) proposed Rule 223-1 under the Investment Advisers Act of 1940 to amend and replace the existing Custody Rule, a latest in a long string of proposed rules and amendments issued by the SEC that either directly or indirectly impact the private funds industry.

In some ways, the Safeguarding Rule is the next step toward retailization of the private fund industry, according to Kelley, who noted that the SEC is increasingly aligning the private fund industry with the retail fund industry despite the former being limited to more sophisticated investors that should be able to accept more risk.

Kelley added that the concern is that the admirable goals behind the proposal may be moot if the practical result is that the markets and industry are unable to develop because of the perceived need to protect sophisticated investors. For example, if private fund GPs are unable to meet client demands for certain alternative assets because they cannot find qualified custodians in the U.S., then they will be incentivized to either stay within the exempt reporting adviser structure or seek to custody such assets with a foreign financial institution.

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