Oct. 28, 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 agency's efforts to enhance investor protections and address gaps in the custody rule, I believe there are specific areas where the rule may exceed the Commission's regulatory authority and encroach upon areas that should be regulated by other agencies. One area of concern is the regulation of digital assets, including cryptocurrencies, which are built on blockchain technology and have the potential to transform the financial landscape. However, the regulatory uncertainties surrounding these assets pose significant challenges for both investors and investment advisers. The proposed rule does outline how investment advisers should safeguard digital assets, but it fails to provide clear guidance on the unique attributes and complexities of these assets. Cryptocurrencies operate in a decentralized manner, making the concept of exclusive control, as required by the proposed rule, difficult to ascertain. The rule acknowledges this challenge but does not offer sufficient guidance on how investment advisers can effectively demonstrate exclusive control over digital assets. This lack of clarity may result in an undue burden on investment advisers and deter them from engaging with digital assets, limiting investor access to this transformative asset class. Furthermore, the rule's definition of qualified custodian raises concerns. The rule does address the application of the custody rule to digital assets, but it falls short in providing comprehensive guidelines. The evolving nature of digital assets warrants closer collaboration between the SEC and other regulatory bodies, such as the Commodity Futures Trading Commission (CFTC), to develop a coherent regulatory framework that encompasses all aspects of digital assets. In addition to the concerns surrounding digital assets, certain aspects of the proposed rule may place an excessive burden on investment advisers without commensurate investor benefits. For example, the requirement for advisers to deliver written notice to clients when opening an account with a custodian seems redundant, as this information is typically communicated through established account opening processes. While ensuring transparency is crucial, the proposed rule should consider practical implementation and avoid placing unnecessary administrative burdens on investment advisers. Moreover, the proposed rule's economic analysis acknowledges varying practices among investment advisers, making it challenging to estimate the economic effects accurately. I urge the SEC to conduct a comprehensive assessment of the potential costs and benefits for investment advisers of different sizes and business models. A one-size-fits-all approach may inadvertently stifle competition, hinder capital formation, and disproportionately affect smaller advisers. In conclusion, while the goal of enhancing investor protections is commendable, the SEC must carefully consider its regulatory authority in light of emerging technologies such as digital assets. Collaboration with other regulatory bodies is essential to establish consistent and comprehensive regulations that account for the unique attributes of these assets. Additionally, a thorough analysis of the economic impact, with a particular focus on the costs and benefits for various types of investment advisers, is crucial in ensuring an effective and balanced regulatory environment. Thank you for the opportunity to provide feedback on this important matter.