Oct. 25, 2023
Dear Securities and Exchange Commission, I am writing to express my concerns regarding the proposed rule "Safeguarding Advisory Client Assets," which aims to enhance the protection of client assets by investment advisers. While I appreciate the SEC's efforts to address gaps in the current custody rule and improve investor protections, there are certain aspects of the proposal that require further clarification and consideration. One area of concern is the lack of clarity on the definition of digital assets. As the proposal broadly includes a range of investments held in a client's account, it is essential to specify what constitutes a digital asset and provide clear guidance to avoid confusion and potential misinterpretation. Digital assets, such as cryptocurrency, have transformed the financial landscape and present unique challenges due to regulatory uncertainties. It is crucial for the SEC to provide precise parameters to ensure consistent compliance and investor protection in this rapidly evolving field. Moreover, the proposed rule addresses the application of the safeguarding requirements to digital assets, but it falls short in providing comprehensive guidance and solutions for demonstrating exclusive control over these assets. Given the distributed and decentralized nature of digital assets, proving exclusive control can be challenging. The SEC should collaborate with industry stakeholders and experts to develop practical and effective methodologies that align with the unique characteristics of digital assets. Additionally, while the proposal offers exceptions for certain assets that cannot be maintained with a qualified custodian, it would be beneficial to provide more specific guidance on the enhanced recordkeeping, separation of duties, and regular reviews required to safeguard these assets. Implementing appropriate controls and oversight measures is crucial to ensure the protection of client assets, regardless of their form, and the proposal should offer more explicit guidance in this regard. Another concern is the requirement for investment advisers to deliver notice to clients when opening an account with a custodian. While the intent is commendable, the proposal does not address the potential challenges that advisers may face when transmitting account details, such as custodian information and custodial account numbers. Clarifying the permissible methods of communication and considering the potential risks associated with sharing sensitive information is crucial to strike the right balance between investor protection and safeguarding client data. Furthermore, I applaud the proposed amendments to the surprise examination requirement, as they contribute to the overall goal of enhancing investor protections. However, the exceptions provided for advisers with discretionary authority over client assets and those with custody solely based on a standing letter of authorization (SLOA) warrant careful consideration. It is important to ensure that these exceptions do not create unintended gaps in protection or opportunities for potential abuse, and appropriate safeguards should be put in place to address these concerns. Lastly, the proposal's changes to Form ADV are a positive step towards increased transparency and regulatory oversight. However, it would be helpful if the SEC provided additional guidance on reporting custody of client assets and the information required about custodians and accountants involved in safeguarding these assets. Clear instructions and standardized reporting can facilitate effective monitoring and compliance, benefitting both advisers and investors. In conclusion, while the SEC's proposed rule "Safeguarding Advisory Client Assets" aims to enhance investor protections and address gaps in the custody rule, there are certain areas that require further clarity, guidance, and consideration, particularly in relation to digital assets. By incorporating feedback and collaborating with industry experts, the SEC can ensure that the final rule strikes the right balance between investor protection and facilitating innovation. I appreciate the opportunity to provide these comments and look forward to further discussions on this important matter. Kind regards, Jeffrey Kahn