Oct. 30, 2023
Dear Securities and Exchange Commission, I, Gergely Winslow, am writing to provide my public comment on the proposed rule "Safeguarding Advisory Client Assets." While I appreciate the SEC's efforts to enhance investor protections and address gaps in the custody rule, I have concerns about certain aspects of the proposed rule and its potential impact on the advisory industry. Firstly, I would like to address the burden placed on exchanges to demonstrate exclusive control over client assets, which may be impractical for certain types of digital assets. As the proposed rules outline, exchanges will be required to provide reasonable assurances that they have exclusive control over client assets. However, this requirement may prove challenging for certain digital assets, which are often held in decentralized networks. Demanding exchanges to demonstrate exclusive control in such cases could stifle the innovative potential of emerging technologies like decentralized finance and blockchain. Moreover, I am concerned about the confusion that may arise from the proposed reporting requirements for participants in decentralized finance (DeFi). The rules encompass a wide range of participants, potentially resulting in multiple, inconsistent reports for the same transaction. This could create unnecessary complexity and hinder the adoption of DeFi by introducing compliance burdens that may not be proportionate to the risks involved. It would be more prudent to establish clear guidelines that strike a balance between effective oversight and unnecessary regulatory friction. In addition to these specific concerns, I urge the SEC to carefully consider the overall manageability of the proposed regulations. The complex nature of the rules, with different reporting requirements for various entities, may lead to confusion and a lack of clarity. It is essential to alleviate the reporting burden on market participants, especially in the rapidly evolving landscape of digital assets. By streamlining and harmonizing reporting requirements, the SEC can facilitate compliance and ensure consistency in reporting while maintaining investor protection. Furthermore, I believe it is crucial for the SEC to assess the potential impacts of the proposed rules on small entities, particularly smaller investment advisers. While the proposed rule acknowledges that the majority of small advisers won't be affected, there remains a significant number of SEC-registered advisers subject to the proposed rule. For small advisers, the compliance costs associated with new reporting and recordkeeping requirements can pose a substantial burden. It is vital to balance enhanced investor protections with the viability and growth of small advisory businesses, promoting competition and innovation while ensuring meaningful safeguards. Finally, I appreciate the transparency and economic analysis provided by the SEC, encompassing costs and benefits of the proposed rule. However, we must also consider the potential unintended consequences and overlooked benefits and costs associated with these proposals. It is important to encourage a comprehensive discussion on reasonable alternatives and facilitate a thorough examination of the economic impacts of the proposed rule. By soliciting public input and taking all perspectives into account, the SEC can make informed decisions that balance investor protection and market efficiency. In conclusion, while recognizing the SEC's aim to strengthen investor protections, I express my concerns regarding certain aspects of the proposed rule "Safeguarding Advisory Client Assets." The burden on exchanges to demonstrate exclusive control over client assets, confusing reporting requirements in decentralized finance, and the manageability of the regulations merit careful consideration. Additionally, I encourage the SEC to assess the impacts on small entities and strive to harmonize reporting requirements while promoting market participation and innovation. Thank you for considering my comments and engaging in this important public discourse. Sincerely, Gergely Winslow