Oct. 21, 2023
The SEC's proposed amendments imposing broad new surprise exam and account statement delivery requirements on investment advisers present serious dangers of overregulation, operational disruption, and excessive costs that undermine their merit. Most alarming is the vastly expanded custody definition, which would trigger new regulatory burdens on advisory firms where risks are minimal. Low-risk activities like limited fee withdrawals being deemed custody exposes the flaws in the SEC's sweeping approach. Layering surprise exams on advisers who present little risk of misappropriation borders on irrational regulatory overreach. Equally dangerous is disrupting long-standing custodian-adviser relationships by rigidly mandating statement delivery details. Custodians depend on adviser personnel, data, and systems to serve end clients. Building wholly separate silos creates dysfunction where none exists today. And it adds costs clients will bear. Even more concerning is this false sense of security from snapshots of exams and prescribed statement delivery. Savvy malfeasance shifts to where the light isn’t shining. Misguided rules breed compliance theatrics, not real protections. The SEC must move beyond flawed assumptions that bigger, blunter regulatory weapons are the answer. The wiser path is principles-based rules scalable to risk, preserving flexibility, and affirming fiduciary duty. Punishing all advisers as potential criminals ushers needless dangers that hurt advisers and consumers alike. These amendments reflect bureaucratic zealotry oblivious to on-the-ground realities. The SEC would do well to engage directly with stakeholders across the spectrum affected before imposing half-baked requirements. Virtue lies in nuance, not absolutism. The SEC should go back to the drawing board. In summary, the SEC's custody proposals promise substantial new dangers that require thorough reevaluation before adoption. Both advisers and clients will suffer under a regime of overbearing and inflexible regulation applied as a blanket mandate. A more targeted, principles-based approach is imperative. Sent with Proton Mail secure email.