Oct. 13, 2023
Dear Chair Gensler, Subject: Serious Reservations about Proposed Rule - Protecting Advisory Client Assets, Release No. IA-6240 (Feb. 15, 2023) I am penning this letter to voice my profound reservations and opposition to the proposed rule by the U.S. Securities and Exchange Commission (the Commission), titled “Protecting Advisory Client Assets”. My concerns are based on various assessments and viewpoints, all of which underscore the potential adverse effects and overarching problems that the proposal could trigger across numerous sectors of the U.S. financial markets. Potential Instability and Indirect Regulation of CFTC-Governed Entities: The proposal could unintentionally regulate entities under the purview of the Commodity Futures Trading Commission (CFTC), potentially causing instability in the U.S. derivatives and commodities markets and putting the country’s farmers and producers at risk. The seeming absence of cooperation with the CFTC, the main regulator of the U.S. derivatives markets, is especially concerning, considering these markets’ crucial role in the U.S. economy and their facilitation of risk management and price discovery. Potential Disruption to Derivatives Markets and Advisory Clients: The proposal could interfere with futures commission merchants, commodity trading advisors, commodity pool operators, and swap dealers’ ability to provide access to derivatives markets, even though these entities already comply with stringent customer protection rules set by the CFTC. It could obstruct advisory clients’ capacity to engage in swaps contracts, contradicting a decade’s worth of decision-making and coordination by domestic and international market and banking regulators. Negative Impact on Commodity Markets: The proposal could negatively affect commodity markets, including those for agricultural, energy, and digital commodities, by mandating an impractical and unfeasible verification process for each commodity transaction, potentially inflicting systemic damage to the U.S. economy. Contradiction with Investor Protection Objectives: While the aim of ensuring high levels of investor protection is praiseworthy, the proposal in its current state appears to contradict this goal by potentially leading to various adverse effects on investors, including their access to a variety of services, assets, and markets with well-established rules and procedures. The proposal introduces fundamental changes to the existing custody framework without a clear policy justification, which could negatively impact a wide array of investors and end users. Economic and Jurisdictional Issues: The proposal significantly diverges from conventional custody practices, substantially escalating the cost of providing custodial services, and employs the SEC’s authority to regulate registered investment advisors (RIAs) as a mechanism to regulate entities beyond its jurisdiction. The absence of a thorough economic analysis and the statement that the SEC “is unable to quantify certain economic effects because it lacks the information necessary to provide estimates or ranges of costs” suggests a potentially hasty approach to rulemaking. Transformation of Traditional Custody and Impact on Digital Assets: The proposal could fundamentally alter traditional custody practices for market participants, despite the fact that custodians have a long-standing tradition of innovation and modernization. The asset-neutral approach and other stipulations could potentially undermine the most fundamental functions of banks, such as cash holding, and could have particularly detrimental effects on the digital asset ecosystem. Considering the seriousness of these concerns and the potential for broad impact across various sectors, I strongly urge the Commission to reconsider the proposal. I am of the belief that the CFTC’s regulatory framework promotes resilient markets that agricultural stakeholders—and more broadly, American businesses—depend on, and any proposal that affects liquidity and customer protections in those markets is not acceptable. Moreover, I highly recommend that any future proposed rulemaking should be grounded on an updated economic analysis that takes into account all pertinent costs, is narrowly tailored to specific instances where the existing custody framework has evidently failed to safeguard investors from loss or misappropriation of traditional assets, and is developed in close collaboration with the primary regulators of the affected entities, markets, and products. I am grateful for the opportunity to provide these comments and am prepared to participate in further discussions to explore feasible alternatives that guarantee robust investor protection without the unintended consequences that the current proposal might entail. Regards, Concerned Citizen Sent with Proton Mail secure email.