Karen Petrou: How the SEC Turned Custody Reform from a Righteous Cause to Jihad and Why it Matters
As we finalized our new in-depth analysis of the SEC’s rewrite of the nation’s custody rules, I asked some of the best-informed people I know if they had ever heard of a financial custodian. All they could come up with is the name of their elementary-school custodian and, in some ways, this is apt. Custody is among the services often called market “plumbing” because one only notices its importance when something goes wrong or realizes how risky poor maintenance is when everything gets wet. The SEC is right to retool custody services – their abuse was all too evident in the Madoff affair and even more costly to hapless investors in the course of crypto chaos. However, as seems often the case with the Commission, it has taken a righteous cause and turned it into a jihad.
When my question about custody services doesn’t outright kill conversation, I often explain the importance of this obscure financial service as follows: when you give an investment adviser your money to buy stock or other assets, he or she does so on your behalf. The adviser takes a bit – okay, maybe a big bit – for his or her trouble, but the assets purchased are yours, not the adviser’s. If the investment is poor because the asset loses value, that’s your bad. But, if the asset loses value or, worse, disappears due to malfeasance or insolvency on the part of the adviser, you’ve quite literally been robbed. To prevent this, custodial …