Oct. 28, 2023
As a small business owner operating within the investment advisory industry, I am deeply concerned about the potential impact of the proposed SEC Release No. IA-6240; File No. S7-04-23. While the intentions behind this regulation may be well-intentioned, I believe that it imposes significant burdens on my company's resources and operations, which could ultimately result in lower returns for our clients or higher fees passed onto them. Firstly, the new requirements surrounding custody arrangements and related documentation seem excessively detailed and time-consuming. For instance, maintaining separate books and records for every single client presents substantial logistics and infrastructure challenges, particularly given the fact that my firm manages portfolios at various stages of development and liquidity profiles. Not only does this requirement significantly increase administrative workloads, but it also raises costs since specialized software systems and storage facilities might now become mandatory investments. Such expenses further aggravate competition disadvantages compared to larger competitors who have economies of scale in technology and human capital management. Secondly, performing comprehensive background checks on prospective hires appears like another costly and arduous process. While ensuring proper oversight over personnel entrusted with managing sensitive client information is crucial, conducting thorough investigations into an applicant’s past takes valuable time away from core competencies needed for successful portfolio management. Moreover, the high price tag attached to such screening services puts small companies at a severe competitive disadvantage vis-à-vis rivals capable of absorbing more significant expenditure outlays without fear of eroding profit margins. Thirdly, the proposal seems to impose undue strain on smaller organizations in terms of testing protocols and documenting findings accurately. The extensive checklist requires careful consideration of operational details, and errors or omissions during these exercises could cause serious repercussions through subsequent regulatory action or reputational damage. This situation makes us worry about bearing excessive risk exposure and incurs substantial costs for continuous monitoring and reporting activities. Furthermore, smaller enterprises might find themselves struggling to keep up with evolving best practices for cybersecurity measures, adding extra layers of regulatory and technological hurdles that are already difficult to manage efficiently. In conclusion, my perspective as a small business operator suggests that the SEC’s latest proposal adds heavy weights to an already challenging landscape where competing effectively demands nimbleness, flexibility, and innovation. These conditions often go hand in hand with restricted financial resources and fewer experienced managers than bigger players in the market. Implementing this regulation poses considerable impediments for our organization, thus raising doubts about whether the overall net gain for investors justifies these incremental costs and hassle. Consequently, there is much debate amongst peers in the sector concerning the tradeoffs involved in embracing these recommendations versus remaining cautious and awaiting alternative approaches to achieve similar objectives. Ultimately, we hope that policymakers and regulating authorities recognize the nuances and complexities inherent to smaller-scale operators and offer tailored relief options for firms in our position. Sincerely, Johan D.