Oct. 28, 2023
Dear Sir/Madam, I am writing to provide my comments on the "Safeguarding Advisory Client Assets" proposal by the Securities and Exchange Commission (SEC). While I appreciate the SEC's efforts to enhance investor protections, I have concerns about potential overreach of regulatory authority and the treatment of digital assets or crypto. Firstly, in regards to potential overreach of regulatory authority, it is important to ensure that each regulatory agency focuses on its specific domain of expertise. The proposed rule appears to expand the SEC's jurisdiction into areas that may be better regulated by other agencies. For example, the treatment of digital assets like cryptocurrency, which are built on blockchain technology and transforming the finance industry, falls under the purview of entities like the Commodity Futures Trading Commission (CFTC) and other regulators. It would be more appropriate for the SEC to collaborate with these agencies to establish a comprehensive regulatory framework instead of taking sole regulatory authority. Concerning digital assets or crypto, the SEC's proposed rule must provide clarity and address the unique characteristics and considerations related to these assets. The rapidly evolving nature of digital assets poses challenges and requires careful calibration of regulations. Imposing a one-size-fits-all approach may stifle innovation and hinder the development of a thriving digital asset market. Moreover, the SEC's proposals should address the technological complexities involved in demonstrating exclusive control over digital assets. The inherent characteristics of blockchain technology, such as decentralization and shared control, make it imperative to develop practical and enforceable regulations that safeguard client assets without stifling the potential of this emerging technology. Furthermore, as the SEC aims to enhance safeguards for assets that cannot be maintained with a qualified custodian, it is crucial to strike the right balance between investor protection and innovation. The proposed rule should provide clear guidance on the enhanced recordkeeping, separation of duties, and regular reviews required for such assets, while also considering the potential impact on investment advisers' ability to navigate evolving markets and provide value to their clients. While the proposed rule emphasizes the segregation of client assets, it is important to recognize that there are valid circumstances in which the commingling of assets could be beneficial to clients, such as strategic rebalancing or creating diversified portfolios. The rule should include appropriate exceptions that take into account these legitimate practices, while still prioritizing the protection of client assets. Furthermore, the amendments to surprise examination requirements should strike a balance between safeguarding client assets and minimizing unnecessary burdens on advisers. The proposed changes requiring written agreements with independent public accountants for surprise examinations demonstrate the SEC's commitment to protecting client assets. However, it is essential to take into consideration the operational challenges and costs associated with implementing these agreements, especially for smaller advisers who may face significant compliance burdens. In addition to the specific concerns outlined above, I appreciate the SEC's consideration of the economic analysis, efficiency, competition, and capital formation effects of the proposed rule. The SEC's efforts in evaluating the costs and benefits of the proposed rule amendments are commendable, considering the diverse practices among investment advisers. I encourage the SEC to continue its robust evaluation and to ensure that the benefits of enhanced investor protection outweigh the compliance costs for investment advisers. In conclusion, while I support the SEC's objective to enhance investor protections through the "Safeguarding Advisory Client Assets" proposal, it is crucial to address the potential overreach of regulatory authority and provide clear, practical, and technology-aware regulations, particularly regarding digital assets or crypto. By considering feasible alternatives and diligently soliciting public input, the SEC can ensure that the final rule strikes the right balance between safeguarding client assets and facilitating innovation in the advisory industry. Thank you for considering my comments. Please feel free to reach out if you need any further clarification or information. Sincerely, John Sohn