Oct. 25, 2023
To whom it may concern at the SEC. I am writing to submit a public comment on the proposed rule "Safeguarding Advisory Client Assets" (RIN: 3235-AL47) by the Securities and Exchange Commission (SEC). While this proposal aims to enhance investor protections and address gaps in the custody rule, I have several concerns regarding its potential negative impact on investor access, specifically within the rapidly evolving realm of digital assets. As we are witnessing a transformative shift in finance with the emergence of digital assets, such as cryptocurrency, it is imperative that regulators strike the right balance between investor protection and fostering innovation. While I appreciate the SEC's efforts to address the challenges posed by such assets, I believe there are aspects in the proposed rule that may unintentionally restrict investor access and hinder the potential benefits of this emerging asset class. The proposed rule expands the scope of coverage to include a broader range of investments held in a client's account, which is commendable in principle. However, when it comes to digital assets, it is crucial to recognize their unique characteristics and the underlying technology of blockchain that enables their existence. Digital assets are not simply traditional securities and therefore may require tailored regulations that account for their technological properties while still safeguarding investors. One concern I have relates to the challenges in demonstrating exclusive control over digital assets. The proposed rule rightly addresses this issue, but it must strike an appropriate balance to ensure that legitimate custodial solutions are recognized and allowed to flourish. It is essential to avoid unintentionally stifling innovation and deterring qualified custodians from providing services in this space, as it may ultimately hinder investor access to digital assets. Additionally, the proposed rule's requirements for investment advisers to maintain custody of certain assets that cannot be maintained with a qualified custodian are reasonable in intent, but the implementation needs careful consideration. Overly burdensome requirements and complex processes may deter investment advisers from offering digital assets to their clients, thereby limiting investor access to this rapidly growing asset class. Furthermore, the amendments to the surprise examination requirement introduce positive steps towards safeguarding client assets. However, it is crucial to ensure that the requirements do not create an unreasonable burden on investment advisers offering digital assets due to their unique control and security mechanisms. Flexibility and a risk-based approach should be incorporated to allow for innovative custody solutions that adequately address the specific characteristics of digital assets. Transparency and clear communication to clients are key pillars of investor protection. The proposed rule's inclusion of disclosure requirements for investment advisers and the amendments to Form ADV are commendable in terms of enhancing transparency. However, it is essential to strike the right balance between ensuring transparency and not excessive onerousness, which could undermine the ability of investment advisers to effectively serve their clients in the digital asset space. While investor protection is of utmost importance, it is equally crucial to consider the potential for innovation, technological advancement, and capital formation that digital assets offer. A cautious, risk-based approach should be taken to ensure fair access for all investors to this promising asset class. Failure to strike the right balance between fostering innovation and investor protection may inadvertently limit the potential benefits that digital assets can bring to our economy. In conclusion, I urge the SEC to carefully consider these concerns and aim for regulations that strike the right balance between investor protection and fostering access to digital assets. By recognizing the unique nature of these assets and fostering innovation, we can ensure that timely and appropriate regulations are put in place to support safe investor participation in this transformative space. Thank you for considering my comments. Sincerely, Jeffrey Kahn