Oct. 25, 2023
To whom it may concern at the Securities and Exchange Commission, I am writing to provide my comments on the proposed rule, "Safeguarding Advisory Client Assets," which aims to enhance investor protections and address gaps in the custody rule. While I appreciate the SEC's efforts to safeguard client assets, I have identified several concerns and issues with the proposed rule that I believe warrant further consideration. One area of concern is the scope of the rule. While it is important to protect a broad range of investments held in a client's account, the proposed rule's definition of assets and inclusion of discretionary authority in custody may have unintended consequences. Some investments, such as digital assets or cryptocurrencies, still operate in a regulatory gray area. The proposal does not adequately address this issue, leading to a fragmentation of regulatory standards and hindering cross-border transactions. It is important for the SEC to align its regulations with international standards to promote consistency and facilitate the growth of these innovative assets. Furthermore, the proposed rule's provisions regarding qualified custodian protections need to be more comprehensive. The SEC acknowledges the challenges in demonstrating exclusive control over digital assets, yet the rule doesn't provide clear guidelines on how investment advisers can effectively safeguard these assets. Given the rapid emergence of digital assets and the potential for market manipulation or theft, it is crucial for the SEC to establish robust protections and guidance. I also have concerns about the proposed rule's treatment of assets that cannot be maintained with a qualified custodian. While the rule recognizes the need for enhanced recordkeeping, separation of duties, and regular reviews for these assets, it could benefit from more specificity. The SEC should provide detailed guidance or industry best practices for advisers to follow in safeguarding such assets, ensuring a uniform and consistent approach across the advisory industry. Additionally, the rule's provisions on the segregation of client assets are crucial for ensuring that these assets are protected from any potential misuse by advisers. While exceptions are provided, it is imperative that the rule prioritizes the protection of client assets and minimizes any conflicts of interest. The SEC should ensure that these exceptions are properly defined and justified to avoid any potential abuse. The proposed rule's requirement for investment advisers to notify clients in writing when opening an account with a custodian is a positive step toward promoting transparency. However, the rule should also consider the inclusion of clear guidelines on what information needs to be conveyed in these notices, such as custodian information and custodial account numbers. This will provide clients with the necessary information to monitor their accounts effectively. Moreover, the proposed changes to the surprise examination requirement should be approached with caution. While the intention to safeguard client assets and reduce the risk of loss is commendable, the SEC must consider the potential burden on smaller advisory firms. These firms may already struggle with limited resources, and imposing additional compliance costs could disproportionately affect them. The SEC should provide reasonable alternatives or exemptions for advisers with limited resources, without compromising investor protection. Furthermore, the amendments to the investment adviser recordkeeping rule and changes to Form ADV are steps in the right direction to improve oversight and investor protection. However, the SEC should ensure that the burden of compliance does not outweigh the benefits. In particular, the estimated costs associated with these amendments and changes should be carefully evaluated and justified to avoid imposing unnecessary expenses on advisers, especially smaller ones. Considering the economic analysis provided in the proposal, it is evident that the SEC has taken into account the costs and benefits of the proposed rule. However, as the economic effects may vary among investment advisers, it is imperative to gather feedback from industry participants on the potential impacts. I appreciate the SEC's invitation for comment on reasonable alternatives and potential overlooked benefits and costs, and I encourage the agency to carefully consider these comments when finalizing the rule. Additionally, I would like to express my concerns regarding the potential impact of the proposed rule on small entities. While most small advisers registered with state authorities may not be affected, it is crucial to assess the potential compliance requirements and costs for the 522 SEC-registered advisers, out of which 321 have custody of client assets. The SEC should ensure that the proposed rule does not unnecessarily burden these small advisers, who may already face resource constraints. In conclusion, I appreciate the SEC's efforts to enhance investor protections and address gaps in the custody rule through the proposed rule. However, I urge the commission to address the concerns and issues I have raised. By aligning regulatory standards for digital assets with international best practices, ensuring clear guidelines for safeguarding assets, and considering the potential impact on small entities, the SEC can foster a robust and competitive advisory industry while maintaining the necessary safeguards for investor protection. Thank you for considering my comments. Please do not hesitate to reach out if you require any further clarification or information. Sincerely, Jeffrey Kahn