Oct. 25, 2023
To Whom It May Concern, I am writing to offer my concerns and comments regarding the proposed rule on "Safeguarding Advisory Client Assets" (Release Nos. IA-5711; File No. S7-14-20). I appreciate the Securities and Exchange Commission (SEC) for taking measures to address the safeguarding of client assets and enhance investor protections. However, upon reviewing the proposal, I have identified certain areas that require further consideration and refinement. Scope of Rule The proposed rule expands the coverage of investments held in a client's account, duly defining assets and incorporating discretionary authority into custody. While these amendments ensure a more comprehensive approach to safeguarding client assets, it is crucial to strike a balance that does not unduly burden investment advisers. The potential regulatory burden should not outweigh the benefits to investors and the market. Qualified Custodian Protections The rule's focus on how investment advisers safeguard client assets, including the application of the rule to crypto assets, is commendable. However, there are challenges in demonstrating exclusive control over these assets. It is essential for the SEC to provide clear guidance on the standards and protocols that would adequately demonstrate exclusive control, considering the dynamic nature of digital assets. Segregation of Client Assets The proposed rule rightly emphasizes the necessity for advisers to segregate client assets from their own. This segregation bolsters investor protection and minimizes the risk of asset loss. However, it is crucial to ensure that exceptions to the segregation requirement are strictly limited and transparently justified. Any exception should prioritize the protection of client assets and endure stringent scrutiny. Amendments to the Surprise Examination Requirement The changes requiring advisers to implement a written agreement with an independent public accountant for surprise examinations are commendable. However, careful thought must be given to the frequency, scope, and cost implications of these examinations. Striking a balance between safeguarding client assets and mitigating undue burdens on advisers is essential. Consideration should be given to assessments based on the size and complexity of the adviser's operations. Amendments to the Investment Adviser Recordkeeping Rule The proposed amendments emphasizing recordkeeping requirements pertaining to client notifications, custodian information, and transactions, among others, are essential to improve oversight and investor protection. However, adequate guidance on the formatting, organization, and retention of these records must be provided to prevent undue compliance complexity and unintended costs for advisers. Economic Analysis The SEC's considerations of costs and benefits in the proposed rule demonstrate a diligent approach to evaluating the potential impact on the industry. While the SEC acknowledges the challenges in estimating economic effects, it is essential to ensure that the proposed rule's benefits outweigh the costs, particularly for smaller advisers. The SEC should adopt a flexible approach in considering the unique circumstances of different advisers within the economy. In conclusion, I recommend that the SEC carefully evaluate each element of the proposed rule, bearing in mind the delicate balance between investor protection and regulatory burden. Community input must be sought and incorporated during the rulemaking process to harness the valuable insights and perspectives of those impacted by the proposed regulation. The SEC should engage in meaningful consultation with affected communities, taking into account their needs and concerns. Thank you for considering my public comment. I trust that the SEC will exhaustively deliberate on the comprehensive range of concerns raised by various stakeholders to ensure that any final rule strikes a balance that comprehensively protects the interests of investors while promoting a vibrant investment advisory industry. Should there be any additional information or clarifications required, please do not hesitate to contact me. Sincerely, Phil Lawrence