Compliance November 1, 2023

Safeguarding Proposal Remains Unpopular in Investment Industry

The same criticisms of the proposal linger, but the SEC is continuing to push ahead.

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The re-opened comment period for the Securities and Exchange Commission’s safeguarding proposal closed on Monday. Industry opinion expressed in the comments remained much the same as it was during the original comment period that expired in May: The rule is too onerous and will hurt investors.

The safeguarding proposal would replace the old custody rule. Currently, advisers must keep assets with a qualified custodian if they have the right to obtain or control assets, including to draw from client assets to pay advisory fees. The custody rule applies to most securities besides registered funds.

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The new proposal adds to these requirements. The first addition is requiring investment advisers to follow custody requirements if they have discretionary trading authority, even if they are not able to draw fees from the assets.

This element has been widely criticized as redefining custody and subsequently increasing cost for clients who want discretionary trading. The American Securities Association, for example, wrote that “discretion, generally, does not equal custody” and said investors “can benefit from discretionary investment management services. However, the Proposal generally increases the cost of providing discretionary advice.”

All Assets

Second, the proposal as it currently stands would include all assets under the custody rule, not just securities. That would include all manner of real assets and commodities, including real estate, art and precious metals.

This element has drawn criticism from Congressional Republicans, who noted that this encroaches on the authority of the Commodity Futures Trading Commission and that some assets cannot be easily custodied or audited. Further, some assets such as real estate are difficult to misappropriate.

Since the proposal would apply to all assets, it would also apply to cash. The most common objection to the proposal from investment industry groups is that it would require advisers to obtain assurances from custodians that cash will be kept segregated. Since many of the largest custodians are commercial banks, which lend cash deposits, these advisers would either have to find another custodian or pay much higher fees to those custodians.

The Insured Retirement Institute, the Investment Company Institute and many others objected to the proposal on that ground. HSBC noted this as well in a comment letter and added that it would make it particularly difficult to keep assets in foreign institutions, which would likewise be subject to the rule if interacting with registered advisers based in the U.S.

Audit Expansion

In expanding custody requirements to all assets, the safeguarding rule also expands the surprise audit requirement to all assets. Currently, advisers are subject to a surprise audit of custodied assets once per year to verify their existence and ownership, but only if those assets are part of a pooled investment vehicle.

Jay Gould, a special counsel with Baker Botts, says, “Advisers with custody or the ability to maintain and control client assets find portions of the rule burdensome and likely to increase costs, particularly expanding the audit provision to cover any other entity, in addition to pooled vehicles.”

Gould adds that “auditor oversight is something that the Commission believes is a significant investor protection feature. I would not expect the Staff to recommend that the Commission materially revise this requirement when they adopt the rule amendments.”

The SEC has not yet set a timetable to finalize the rule.

Data & Research November 1, 2023

US Consumers Cite Credit Card, Medical Debt as Common Culprits Delaying Retirement

30% of pre-retirees said credit card debt is putting post-work plans on hold, according to a new study by ScoreSense, with medical debt another major culprit.

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Credit card debt is the most likely form of regular payments to negatively impact people’s retirement preparation, according to a consumer sentiment survey of American consumers by ScoreSense, a credit score and monitoring provider. The survey revealed that credit card debt (30%) was the leading type of debt that respondents said could delay their retirement, followed by medical debt (29%).

Mortgage loans (26%), personal loans (18%), car loans (16%), student loans for children (15%) and student loans for the respondent or their spouse (12%) were other categories from which respondents chose. Additionally, 30% said “none of the above” choices could delay their retirement.

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ScoreSense fielded responses from 600 U.S. consumers between the ages of 40 and 79 who have yet to retire.

According to the survey, respondents aged 70 through 79 attributed their delay in retiring to credit card debt (29%), mortgage loans (28%) and medical debt (27%). To boost retirement savings, one out of every three respondents took a second job or side gig, which occurred across all age groups.

Inflation, combined with the higher cost of borrowing, is certainly affecting retirement plans, according to the credit monitoring firm. ScoreSense noted in a September post that ongoing inflation means people are paying significantly more now, as compared with one year ago, to purchase the same items. At the same time, the Fed continues to raise interest rates in an effort to combat inflation—meaning people are paying more to use their credit cards.

“High interest rates continue to deter consumers from applying for and opening credit accounts,” the report stated. “While credit balances remain high as consumers struggle to pay off their credit cards, there is less credit usage compared to last year as consumers are tightening their spending habits.”

Based on the consumer sentiment survey, only 30% of respondents believe they will retire on time, and 18% think they will retire later than age 67. Additionally, the report found 40% of respondents did not know the approximate balance of their retirement accounts.

“In the midst of a tough inflationary economy, it’s not surprising that many Americans are not where they want to be on their retirement goals,” Carlos Medina, senior vice president at One Technologies LLC, which offers ScoreSense to employees, said in a statement. “What I find disturbing from our survey is the large number of people who don’t know what they have or what it will take to retire. While it’s never too late to save for anyone, young people need to create retirement savings accounts that can really blossom over time.”

Respondents said Social Security (65%) is the leading method to fund their retirement, followed by savings in a bank account (44%). Those aged 70 through 79 were significantly more likely to include stock and bond investments to save for retirement compared to other groups. Meanwhile, those aged 40 through 49 relied more heavily on a 401(k) account than other age groups.

Roughly seven out of every 10 respondents had a 401(k) with an employer, and 56% said their employer matched a percentage of their contributions. More than 60% of people are still contributing to their accounts, while one-quarter reported increasing their contributions within the past 12 months.

For those with no employer-provided retirement account, who had an individual retirement account or an independent 401(k) account, only 29% reported contributing to their accounts, and 43% said they have stopped contributing to their accounts, as compared with 12% in employer-provided 401(k) plans.

In addition to delaying retirement savings, consumers are missing credit card payments as well. The number of delinquent credit accounts—defined as past due for more than 30 days—reached a three-year high, jumping up by 10% year-over-year in Q3 2023 from Q2 2023, ScoreSense found. 

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