Oct. 30, 2023
Dear Securities and Exchange Commission, I am writing to provide my comments on the proposed rule "Safeguarding Advisory Client Assets," which aims to enhance investor protections and address gaps in the custody rule for investment advisers. While I appreciate the SEC's efforts to safeguard client assets and improve transparency, there are some concerns that I would like to address. One of the key concerns I have is the lack of clarity in the definition of digital assets within the proposed rule. As we all know, digital assets, including cryptocurrencies, have emerged as innovative financial instruments built on blockchain technology. However, the rapidly evolving nature of these digital assets has created regulatory uncertainties, and it is crucial that the SEC provides clear guidance on what constitutes a digital asset. Without this clarity, there is a risk of confusion and potentially misinterpretation among investment advisers, which could hinder investor protections. Furthermore, the proposed rule acknowledges the challenges in demonstrating exclusive control over digital assets. This issue is of utmost importance, considering the decentralized nature of blockchain technology. Investment advisers may face difficulties in establishing exclusive control over digital assets held on behalf of their clients. Therefore, it is vital that the proposed rule provides specific guidance on how investment advisers can demonstrate sufficient control and safeguard these digital assets effectively. In addition to digital assets, the proposed rule introduces amendments to the current custody rule, recordkeeping requirements, and registration obligations for investment advisers. While these amendments aim to enhance investor protections and improve transparency, it is essential to strike a balance between safeguarding client assets and preventing undue compliance burdens on investment advisers. As part of the proposed rule, enhanced recordkeeping and regular reviews are required for assets that cannot be maintained with a qualified custodian. While these measures are important for protecting client assets, there may be some concerns regarding the associated costs and administrative burdens for investment advisers. Therefore, it would be beneficial if the SEC provides sufficient guidance and clarity on the scope of these recordkeeping requirements to mitigate any unintended consequences. Additionally, the proposed rule requires investment advisers to deliver written notice to clients when opening an account with a custodian. This is an important step towards ensuring transparency and providing clients with relevant custodian information. However, it is crucial that the SEC considers streamlining the delivery process and explores electronic delivery options to reduce administrative burdens and costs for both investment advisers and their clients. Moreover, the proposed amendments to the surprise examination requirement aim to further enhance the protection of client assets. While I support these amendments, it is important to consider potential exceptions or alternative approaches for advisers with discretionary authority over client assets or those with custody solely due to a standing letter of authorization. These exceptions would help ensure a practical and efficient implementation of the surprise examination requirement without imposing unnecessary burdens on investment advisers. Lastly, I commend the SEC for the comprehensive economic analysis conducted in relation to the proposed rule. It is crucial to consider the costs and benefits associated with the proposed amendments, as well as the impact on efficiency, competition, and capital formation. I encourage the SEC to continue seeking public comments and to carefully consider potential alternatives and any unintended consequences that may have been overlooked. In conclusion, while the proposed rule "Safeguarding Advisory Client Assets" addresses important investor protection concerns and the challenges posed by digital assets, there are areas where clarity and refinement are needed. Specifically, I urge the SEC to provide clear guidance on the definition of digital assets and to offer more specific guidance on demonstrating exclusive control over these assets. Additionally, I encourage the SEC to strike a balance between safeguarding client assets and minimizing compliance burdens for investment advisers through clear and streamlined processes. Thank you for considering my comments on this important proposed rule. Sincerely, David