House lawmakers ask banking regulators to review SEC custody rule

The Republican and Democratic leaders of two House subcommittees today asked banking regulators to review the Security and Exchange Commission’s proposed rule for safeguarding advisory client assets and determine whether it conflicts with their regulatory powers. In a joint letter, the four lawmakers urged the Federal Reserve, FDIC and OCC to engage the SEC “to mitigate potential unintended outcomes for investors, bank customers, financial markets and transmission channels for monetary policy effects.”

The SEC proposal would significantly restructure and expand the current custody rule as part of the agency’s attempt to address what it views as the potential risks posed by cryptocurrency. In May, ABA and three financial industry associations urged the SEC to withdraw the proposal, saying that it represented a fundamental departure from current industry practice and could harm financial markets. The lawmakers expressed similar concerns, pointing to the proposed rule’s requirement to segregate client cash, which would be a shift from current banking practices. The letter was signed by House Financial Institutions and Monetary Policy Subcommittee Chair Andy Barr (R-Ky.) and Ranking Member Bill Foster (D-Ill.), and Capital Markets Subcommittee Chair Ann Wagner (R-Mo.) and Ranking Member Brad Sherman (D-Calif.).

“Deposit-taking, custody and safekeeping are among the oldest and most well-established banking activities,” the lawmakers said. “Supervision and regulation of a bank’s balance sheet and risk is the fundamental obligation of the banking regulators. Given the proposed rule’s interplay with banking regulations which would alter aspects of the banking system, we request your response to these questions and strongly encourage you to engage with the commission, as necessary, to mitigate conflicts with prudential banking regulations and avoid unintended consequences for consumers and the broader banking system.”