LSTA, Inc. today welcomes the Securities and Exchange Commission’s proposed amendments to the investment adviser custody rule, particularly the Commission’s proposal to provide an exception from the custody rule for authorized discretionary trading activity. We greatly appreciate the Commission’s efforts to propose common sense solutions to important, longstanding industry issues.

The proposal represents an important step toward resolving uncertainty regarding the treatment of discretionary trading in assets that do not settle on a traditional delivery-versus-payment (“DVP”) basis, including corporate loans and other assets traded and settled through established market practices.

“We appreciate the Commission’s recognition that the custody rule should focus on the risk of unauthorized access to or misuse of client assets, rather than treating the mechanics of an authorized transaction as custody,” said Sean Griffin, CEO of LSTA, Inc. “LSTA has advocated for greater clarity on this distinction for many years, particularly for the corporate loan market, where transactions frequently settle through mechanisms that are different from DVP transactions.”

Under the SEC’s proposal, an adviser would be able to rely on an exception from the custody rule for assets over which it has custody solely because of its discretionary trading authority, provided specified conditions are satisfied. Among other things, the adviser would be required to limit its trading authority to designated client accounts and would be prohibited from transferring client assets to itself, its related persons, or other accounts except as directed by the client in connection with an authorized trade.

LSTA, Inc. has long emphasized that the custody analysis should distinguish between custody risk and settlement risk. The custody rule is intended to address the potential for an adviser to misappropriate, misuse, or improperly transfer client assets. The fact that an authorized transaction settles on a non-DVP basis does not create such a risk.

The SEC’s proposal expressly recognizes this distinction, stating that the custody rule is not generally intended to address risks associated with the settlement of transactions.

LSTA, Inc. also supports the Commission’s recognition that ownership of certain assets, including corporate loans, may appropriately be recorded in the client’s name on the books of an issuer, agent, administrator, or other applicable party rather than through a traditional securities custody arrangement.

The proposed framework would provide important regulatory clarity while preserving safeguards designed to prevent unauthorized transfers of client assets. LSTA, Inc. looks forward to reviewing the proposal in detail and providing additional comments to the Commission during the public comment process.

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