Oct. 27, 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 aim of the rule to enhance investor protections and address gaps in the custody rule, there are specific aspects of the proposal that raise potential issues and unintended consequences. One area of concern is the proposed scope of the rule, which expands coverage to include a broader range of investments held in a client's account. While the intention to protect investors is commendable, this expansion may inadvertently hinder market liquidity for digital assets, making it more difficult for investors to buy and sell these assets. Given that digital assets, such as cryptocurrencies, are built on blockchain technology and have the potential to transform finance, it is crucial to provide regulatory certainty and avoid stifling their growth. Furthermore, the proposal introduces requirements for investment advisers to demonstrate exclusive control over crypto assets. However, this can be a significant challenge given the nature of digital assets and the decentralized nature of blockchain technology. It's important to acknowledge that strict custody requirements might not always align with the unique characteristics of digital assets. Additionally, the proposed rule addresses the challenge of safeguarding assets that cannot be maintained with a qualified custodian. While enhanced recordkeeping and regular reviews are required, it is essential to strike a balance between investor protection and operational feasibility for investment advisers. The requirement to maintain additional records and adhere to stricter procedures may impose significant costs on advisers and potentially hinder capital formation. Another concern is the potential impact on competition and compliance costs for qualified custodians. While the rule aims to enhance client and investor protection, it is crucial to carefully consider the consequences of imposing additional compliance requirements on custodians. Excessive burdens could limit competition and result in higher costs for investors. Moreover, the proposed changes to the surprise examination requirement may impose a considerable burden on investment advisers. While the objective of safeguarding client assets and reducing the risk of loss is commendable, the costs associated with implementing a written agreement with an independent public accountant should be carefully considered. It's essential to strike a balance between the benefits of surprise examinations and the potential burden on investment advisers, particularly smaller firms. Furthermore, the economic analysis of the proposed rule acknowledges the challenges in estimating economic effects due to varying practices among investment advisers. As such, it becomes even more crucial to carefully weigh the costs and benefits of the rule and to consider reasonable alternatives that may achieve the objective of investor protections while mitigating the potential economic burden on advisers. In conclusion, while I appreciate the SEC's efforts to enhance investor protections and address gaps in the custody rule, it is important to consider the potential negative impact of the proposed rule on market liquidity for digital assets. Regulatory uncertainties surrounding digital assets already pose challenges, and it is vital to ensure that the proposed rules do not further hinder the growth and innovation in this space. Careful consideration of the costs and benefits, as well as the potential unintended consequences, is essential to strike the right balance and foster a healthy investment environment. Thank you for considering my concerns, Sunny Ali