Oct. 18, 2023
Dear Securities and Exchange Commission, I am writing to submit my public comment on the proposed rule "Safeguarding Advisory Client Assets" (File No. S7-02-20) from the Securities and Exchange Commission (SEC). I would like to express my concerns and provide nuanced points against the SEC rule proposals. While I appreciate the SEC's efforts to enhance investor protections and address gaps in the custody rule, I believe there are certain aspects of the proposed rule that need further consideration. Scope of Rule: The expansion of the rule's coverage to include a broader range of investments held in a client's account could have significant implications for investment advisers. While the intent of this expansion is to further protect client assets, it is essential to strike a balance to avoid undue burdens on investment advisers. The proposed expansion may require additional safeguards and compliance measures, leading to increased costs and administrative burdens. Qualified Custodian Protections: I appreciate the SEC's focus on enhancing the protection of client assets, particularly in relation to crypto assets. However, the proposed rule poses challenges for investment advisers by introducing new considerations, such as demonstrating exclusive control over crypto assets. Given the evolving nature of digital assets and the complexity of their custody arrangements, it is crucial to provide clear guidance and realistic expectations to ensure compliance among investment advisers. Certain Assets Unable to be Maintained with a Qualified Custodian: The requirement for investment advisers to safeguard assets that cannot be maintained with a qualified custodian may present challenges. The enhanced recordkeeping, separation of duties, and regular reviews outlined in the proposed rule will undoubtedly require additional time and resources from investment advisers. It is imperative that the SEC carefully considers the feasibility of these requirements to avoid placing undue burdens on investment advisers. Transition Period and Compliance Date: While I appreciate the SEC's provision of a one-year transition period for compliance with the new rule, the varying compliance dates based on assets under management may lead to implementation challenges for advisers with different client bases. It would be helpful if the SEC takes into account the diversity of investment advisers and the need for sufficient time to adapt their practices to the new rule. Digital Assets or Crypto: The proposed rule attempts to address the challenges posed by digital assets and cryptocurrencies, which have the potential to transform the finance industry. However, it is essential to be mindful of the regulatory uncertainties in this realm. The proposed regulations create reporting requirements for various participants in decentralized finance (DeFi), which may result in multiple, inconsistent reports for the same transaction. This can lead to confusion and hinder transparency rather than improve investor protections. Poorly Defined Terms: One concern I have is the use of undefined terms, such as platform, software, and ledger, in the proposed rule. These terms are susceptible to multiple interpretations, which can lead to confusion and inconsistent enforcement. Moreover, the definition of other terms, like wallet and validator, does not accurately capture their technical meaning, further exacerbating the potential for misunderstanding. It is crucial that the SEC provide clear and precise definitions to foster compliance and understanding among investment advisers. In conclusion, I believe that the SEC's proposed rule "Safeguarding Advisory Client Assets" has the potential to enhance investor protections. However, I urge the SEC to consider the concerns I have raised regarding the scope of the rule, qualified custodian protections, assets unable to be maintained with a qualified custodian, and the transition period and compliance dates. Additionally, I emphasize the need for clarity and precision in defining terms related to digital assets and cryptocurrencies to prevent confusion and facilitate compliance. Thank you for considering my comments and feedback on the proposed rule. I trust that the SEC will carefully evaluate all input received and make revisions that ensure effective and balanced regulations.