Oct. 29, 2023
Dear Securities and Exchange Commission, I am writing to express my concerns regarding the proposed rule, "Safeguarding Advisory Client Assets," which aims to enhance investor protections and address gaps in the custody rule. While I appreciate the SEC's efforts to safeguard client assets, I believe there may be potential overreach of regulatory authority that could encroach on areas that should be regulated by other agencies. One area of concern is the proposed rule's application to digital assets or cryptocurrencies. Digital assets, such as cryptocurrencies, are a rapidly growing and evolving asset class that is transforming the financial landscape. However, regulatory uncertainties surrounding these assets still abound. It is crucial for the SEC to approach the regulation of digital assets with caution, considering the jurisdictional complexities and potential impacts on innovation in the financial industry. The SEC's proposed rule defines assets broadly and includes discretionary authority in custody. While it is essential to address the safeguarding of client assets, the rule should not unduly restrict investment advisers' ability to offer innovative investment opportunities to clients, including digital assets. The SEC should take into account the efforts of other regulatory bodies, such as the Commodity Futures Trading Commission (CFTC), in establishing a clear regulatory framework for digital assets to avoid duplicative or conflicting regulations. Additionally, the proposed rule raises concerns regarding the demonstration of exclusive control over digital assets. Given the nature of blockchain technology and the distributed ledger system, it can be challenging to provide traditional proofs of custody in the same way as with traditional assets. Rigorous regulation might stifle innovation and may not necessarily enhance investor protection if it impedes the development and adoption of secure custody solutions for digital assets. It is also essential to consider the unique characteristics of digital assets and the potential financial benefits they can bring to investors. Strict regulation could prevent investors from reaping the benefits of this transformative technology. Instead, the SEC should focus on providing clear guidelines and fostering collaboration with industry participants to develop best practices for the secure custody of digital assets. This collaborative approach would allow the industry to grow responsibly, ensuring investor protection while encouraging innovation. Furthermore, the proposed rule's recordkeeping requirements for digital assets may impose an undue burden on investment advisers. Maintaining accurate and transparent records is crucial for investor protection and regulatory oversight. However, it is essential to balance these requirements with the potential costs and the technology limitations involved in managing digital assets. The SEC should consider a risk-based approach to recordkeeping, taking into account the unique features and challenges of digital assets. In conclusion, while I agree with the SEC's goal of enhancing investor protections, I believe the proposed rule's application to digital assets requires careful consideration. The SEC should avoid potential overreach of regulatory authority, work collaboratively with other agencies, and develop tailored regulations that balance investor protection with fostering innovation in the digital asset space. Thank you for considering my comments on the proposed rule. I urge the SEC to take into account the concerns raised and work towards creating a regulatory environment that fosters investor protection, innovation, and the responsible growth of the digital asset industry. Sincerely, Mike F-A