Oct. 28, 2023
The SEC's actions exceed its statutory authority. The SEC's proposed amendments to the custody rule, Rule 206(4)-2 under the Investment Advisers Act of 1940, exceed the SEC's statutory authority and contravene Congress's intent as expressed in the Dodd-Frank Act. The Dodd-Frank Act amendments only authorize the SEC to "take such steps to safeguard client assets over which such adviser has custody, including, without limitation, verification of such assets by an independent public accountant, as the Commission may, by rule, prescribe." This language does not grant the SEC new authority to regulate non-securities assets like crypto. Rather, it simply allows the SEC to issue rules regarding the existing authority over client assets and custodial practices for funds and securities. By seeking to expand the custody rule to cover "assets" rather than "funds and securities," the SEC is improperly asserting jurisdiction over non-security crypto assets without proper statutory authorization from Congress. The legislative history indicates no intent to expand the types of assets subject to custody requirements. The use of the term "assets" rather than "funds and securities" was not specifically discussed, suggesting there was no conscious effort to broaden the SEC's authority. Congress has granted the SEC express directives and specific mandates to regulate in other statutes, like the Dodd-Frank Act itself. The open-ended language in the custody rule amendments lacks the hallmarks of a clear Congressional mandate. The SEC cannot rely on vague, ambiguous language to assume vast new powers over a significant segment of the crypto market when Congress has not expressly granted that authority. By declaring that "assets" includes crypto, the SEC is making a binding rule regarding its jurisdiction without proper notice-and-comment procedures. This unilateral assertion of authority over non-security crypto assets violates the Administrative Procedure Act. Absent express and unambiguous Congressional authorization, the SEC cannot assume jurisdiction over non-security crypto assets. The proposed custody amendments should be limited to the SEC's existing authority over funds and securities. The SEC's attempt to unilaterally expand its regulatory reach beyond the limits of its statutory authority should be rejected.