On February 15, 2023, the SEC voted 4-1 to propose to amend and redesignate Rule 206(4)-2 (the current custody rule) as new Rule 223-1 (the proposed safeguarding rule) under the Investment Advisers Act of 1940. Similar to the current custody rule, the proposed safeguarding rule would require registered investment advisers to safeguard client funds and securities when the adviser holds or has authority to obtain possession of such assets in order to protect against loss, misuse, theft or misappropriation. However, the proposed safeguarding rule introduces a number of significant amendments that the SEC characterizes as designed to enhance investor protections and account for changes in technology, advisory services and custodial practices in the years since the current custody rule was last amended. Among other things, the proposed safeguarding rule would: expand the current custody rule to apply to all client “assets” and not only client “funds and securities”; clarify additional advisory activities covered by the rule (including explicitly covering discretionary trading authority); create extensive new requirements for advisers and qualified custodians (including entry into written agreements with prescriptive requirements); introduce significant new requirements to the exception for privately offered securities and extend the exception to certain physical assets that would be covered under the rule’s expanded scope; and expand the availability of the current custody rule’s audit provision as a means of satisfying the surprise examination requirement while imposing new requirements on advisers that rely on this exception. The proposal also includes related amendments to the rule governing books and records required to be maintained by advisers and to Form ADV regarding advisers’ reporting obligations in line with the proposed safeguarding rule’s requirements. The SEC is seeking comment from the public on the proposal, due 60 days after the date of publication of the proposed amendments in the Federal Register. The proposed compliance transition period following adoption of the rule would be one year for large advisers, or 18 months for advisers with under $1 billion in regulatory assets under management.