Oct. 31, 2023
Dear Securities and Exchange Commission, I am writing to express my concerns regarding the Safeguarding Advisory Client Assets proposal. While the intention behind the rule is to enhance investor protections and address gaps in the custody rule, there are several areas that require further consideration. One specific area of concern is the inadequate consideration of the unique properties of cryptocurrency. The proposed rule fails to take into account the decentralized nature and technological complexities of cryptocurrency, resulting in impractical regulatory requirements. Digital assets such as cryptocurrency have transformed the traditional finance industry and offer new opportunities for investment and wealth creation. However, regulatory uncertainties continue to pose challenges for both investors and investment advisers. The proposed rule aims to expand the coverage of assets held in a client's account and includes provisions for crypto assets. However, it lacks a nuanced understanding of the intricacies of cryptocurrency. The SEC needs to recognize that digital assets operate on a decentralized network and do not conform to the same centralized structures as traditional financial instruments. Applying the same custody requirements to crypto assets may not be feasible or effective. Furthermore, the rule should recognize that the custody of digital assets such as cryptocurrency is inherently different from custody in the traditional sense. The concept of exclusive control, which is central to the proposed rule, may not be applicable to digital assets. Cryptocurrency is typically stored in digital wallets that utilize encryption and private keys for security. Simply demonstrating exclusive control over digital assets becomes challenging due to the complex nature of these technologies. Additionally, the rule's requirement for qualified custodian protections leaves a gap in understanding how investment advisers can safeguard assets that cannot be maintained with a qualified custodian. The proposal mentions enhanced recordkeeping, separation of duties, and regular reviews, but fails to provide clear guidance on how to effectively safeguard these assets. More comprehensive guidelines and best practices should be established to ensure the protection of client assets, especially in cases where custody with a qualified custodian is not feasible. Moreover, it is crucial to address the issues surrounding the segregation of client assets. While exceptions are provided, the rule must prioritize the protection of client assets and ensure that they are segregated from the adviser's assets. This segregation is essential to maintain investor confidence and protect against potential conflicts of interest or mismanagement. Furthermore, the proposed amendments to the surprise examination requirement and investment adviser recordkeeping rule are commendable steps towards safeguarding client assets. However, it is important to take into consideration the potential burden these requirements may place on investment advisers. The SEC should carefully evaluate the costs and benefits of these provisions to ensure they do not stifle innovation or disproportionately impact small and emerging advisers. In conclusion, while I appreciate the Securities and Exchange Commission's efforts to enhance investor protections through the Safeguarding Advisory Client Assets proposal, I urge you to consider the unique properties of digital assets, particularly cryptocurrency. The proposed rule should be revised to account for the decentralized nature and technological complexities associated with digital assets, providing clear and practical guidelines for investment advisers. Furthermore, a comprehensive approach that balances investor protection with the burden on investment advisers should be embraced. Thank you for your attention to these concerns. I look forward to continued discussions on this important matter. Sincerely, Elizabeth Miller