Oct. 17, 2023
Dear Chair Gensler, Profound Concerns Regarding the Proposed Rule - Safeguarding Advisory Client Assets, Release No. IA-6240 (Feb. 15, 2023) I am writing to express my deep-seated concerns and objections regarding the U.S. Securities and Exchange Commission’s (the Commission) proposed rule titled "Safeguarding Advisory Client Assets". My apprehensions stem from various analyses and perspectives, all of which highlight potential negative impacts and overarching issues that the proposal could instigate across multiple sectors of the U.S. financial markets. 1. Potential Disruption and Indirect Regulation of CFTC-Oversighted Entities: The proposal might inadvertently regulate entities overseen by the Commodity Futures Trading Commission (CFTC), potentially destabilizing the U.S. derivatives and commodities markets and jeopardizing the nation’s farmers and producers. The apparent lack of collaboration with the CFTC, the primary regulator of the U.S. derivatives markets, is particularly troubling, given the integral role these markets play in the U.S. economy and the risk management and price discovery they facilitate. 2. Possible Interference with Derivatives Markets and Advisory Clients: The proposal could disrupt futures commission merchants, commodity trading advisors, commodity pool operators, and swap dealers in facilitating access to derivatives markets, despite these entities already adhering to robust customer protection rules imposed by the CFTC. It might hinder advisory clients’ ability to enter into swaps contracts, contradicting a decade of decision-making and coordination by domestic and foreign market and banking regulators. 3. Adverse Impact on Commodity Markets: The proposal could adversely impact commodity markets, including those for agricultural, energy, and digital commodities, by requiring an impractical and unworkable verification process for each commodity transaction, potentially causing systemic harm to the U.S. economy. 4. Conflict with Investor Protection Goals: While the goal of ensuring high levels of investor protection is commendable, the proposal, in its current form, seems to conflict with that objective by potentially resulting in various negative impacts on investors, including their access to various services, assets, and markets with well-established rules and procedures. The proposal makes fundamental changes to the current custody framework without a clear policy rationale, which could adversely affect a diverse range of investors and end users. 5. Economic and Jurisdictional Concerns: The proposal deviates significantly from traditional custody practices, dramatically increasing the cost of offering custodial services, and utilizes the SEC’s authority to regulate registered investment advisors (RIAs) as a means to regulate entities outside of its jurisdiction. The lack of a comprehensive economic analysis and the statement that the SEC “is unable to quantify certain economic effects because it lacks the information necessary to provide estimates or ranges of costs” indicates a potentially reckless approach to rulemaking. 6. Reshaping Traditional Custody and Impact on Digital Assets: The proposal would fundamentally reshape traditional custody practices for market participants, even though custodians have a long history of innovating and modernizing their practices. The asset-neutral approach and other requirements could undermine banks’ most basic functions, such as holding cash, and have particularly harmful impacts on the digital asset ecosystem. Given the gravity of these concerns and the potential for widespread impact across various sectors, I urge the Commission to withdraw the proposal. I believe that the CFTC’s regulatory framework fosters resilient markets that agriculture stakeholders—and American businesses more broadly—rely on, and any proposal that impacts liquidity and customer protections in those markets is unacceptable. Furthermore, I strongly recommend that any future proposed rulemaking should be based on an updated economic analysis that accounts for all relevant costs, narrowly tailored to specific instances where the current custody framework has demonstrably failed to protect investors from loss or misappropriation of traditional assets, and developed in close consultation with the primary regulators of the impacted entities, markets, and products. I appreciate the opportunity to provide these comments and stand ready to engage in further discussions to explore viable alternatives that ensure robust investor protection without the unintended consequences that the current proposal may bring about. Michael Chusid DMD