Oct. 22, 2023
Dear Securities and Exchange Commission, I am writing to express my concerns regarding the proposed rule on "Safeguarding Advisory Client Assets". While I appreciate the SEC's efforts to enhance investor protections and address gaps in the custody rule, I believe that there are aspects of the proposed rule that may exceed the SEC's regulatory authority and encroach on areas that should be regulated by other agencies. One area of concern is the inclusion of digital assets, specifically cryptocurrencies, within the scope of the proposed rule. The SEC faces unique challenges in regulating this rapidly evolving field, and it is crucial that the agency considers the expertise and jurisdiction of other regulatory bodies, such as the Commodity Futures Trading Commission (CFTC) and the Financial Crimes Enforcement Network (FinCEN), when developing regulations for digital assets. The SEC should avoid duplicative or conflicting rules that could stifle innovation and hinder the growth of this transformative technology. While the SEC has acknowledged the challenges in demonstrating exclusive control over crypto assets, I believe that the proposed rule's requirements may place an undue burden on investment advisers. The dynamic nature of digital assets and the decentralized nature of blockchain technology make it difficult to meet the strict custody requirements outlined in the proposed rule. As a result, smaller investment advisers, who may not have the resources to fully comply with these requirements, could be disproportionately impacted by the proposed rule. Furthermore, the proposed rule's amendment to the surprise examination requirement raises concerns about its potential impact on competition and the efficient functioning of the market. While I recognize the importance of safeguarding client assets, the additional costs and administrative burdens imposed by this requirement could hinder advisory services and discourage qualified custodians from entering the market. It is crucial that the SEC considers the potential unintended consequences of such amendments and ensures that the benefits of enhanced investor protection outweigh the costs. Additionally, I would like to raise concerns about the economic analysis conducted by the SEC. While I understand the challenges in estimating the economic effects of the proposed rule due to varying practices among investment advisers, it is important for the agency to conduct a comprehensive analysis that considers both the qualitative and quantified assessments of the rule's economic effects. This will ensure that the regulatory requirements strike the right balance between investor protections and the efficiency and competitiveness of the market. In conclusion, while I commend the SEC for its efforts to enhance investor protections, I believe that the proposed rule may exceed the agency's regulatory authority in certain areas, and could potentially stifle innovation and hinder market competition. I urge the SEC to carefully consider the concerns raised and collaborate with other regulatory bodies to ensure a balanced and effective regulatory framework for the safeguarding of advisory client assets. Thank you for considering my comments. Sincerely, Elliott Lynam