Oct. 18, 2023
Dear Secretary, I am writing to express my strong opposition to the proposed rule 223-1 under the Investment Advisers Act of 1940, which would redesign and amend the current custody rule. I am a registered investment adviser who advises several private funds that are subject to the private fund adviser audit rule. I believe that the proposed rule 223-1 would impose unnecessary and burdensome requirements on me and my clients, and would not enhance investor protection. The proposed rule 223-1 would expand the scope of the current custody rule to cover not only client funds and securities, but also client assets. These are “funds, securities, or other positions held in the client’s account.” This would mean that I would have to obtain a surprise examination by an independent public accountant for any client asset that I have custody of, unless I comply with the audit provision of the proposed rule. However, the audit provision of the proposed rule is also more restrictive than the current custody rule’s audit provision, which I already comply with under the private fund adviser audit rule. The proposed rule 223-1 would limit the availability of the audit provision from pooled investment vehicle clients to any other entity whose financial statements are able to be audited in accordance with the proposed rule. This would exclude some of my private fund clients that are non-entity forms, such as trusts or partnerships. The proposed rule 223-1 would also require the audited financial statements of non-U.S. clients to contain information substantially similar to statements prepared in accordance with U.S. GAAP and material differences with U.S. GAAP to be reconciled. This would increase the cost and complexity of auditing some of my foreign private fund clients that follow different accounting standards. The proposed rule 223-1 would also require that I or the entity enter into a written agreement with the auditor requiring the auditor to notify the Commission in the event of the auditor’s termination or issuance of a modified opinion. This would interfere with my contractual relationship with the auditor and potentially expose me to liability. The proposed rule 223-1 would also have a significant impact on international affairs, especially for investment advisers with clients or operations in other countries. Some possible implications are: The proposal could create conflicts or inconsistencies with the laws and regulations of other jurisdictions that have different or more lenient standards for custody of client assets. For example, some countries may not require qualified custodians to be registered or regulated by a governmental authority, or may allow advisers to use self-custody or affiliated custody arrangements. The proposal could also affect the ability of advisers to use certain types of assets or instruments that are common or popular in other markets, such as cryptocurrencies, contracts, or physical commodities. The proposal could increase the operational and compliance costs and risks for advisers who have to deal with multiple qualified custodians across different countries and regions. For instance, advisers would have to ensure that the qualified custodians they use meet the SEC’s requirements and standards, which may vary from those of the local regulators. Advisers would also have to coordinate and monitor the surprise examinations and audits of their client accounts by independent public accountants, which may involve different languages, time zones, and reporting formats. The proposal could affect the competitiveness and attractiveness of U.S.-based advisers in the global market, as they may face more regulatory hurdles and scrutiny than their foreign counterparts. The proposal could also discourage foreign clients from investing with U.S.-based advisers, as they may perceive the proposal as intrusive or burdensome. Alternatively, the proposal could encourage other countries to adopt similar or more stringent rules for custody of client assets, which could create a level playing field or a race to the top among regulators. I do not see how these proposed changes would improve the safeguarding of client assets or enhance investor protection. The current custody rule already provides adequate safeguards for client funds and securities, and does not need to be expanded to cover other client assets that are less susceptible to misappropriation or misuse. The current custody rule’s audit provision already ensures that private fund clients receive audited financial statements that are prepared in accordance with generally accepted accounting principles and that are subject to an independent verification by a PCAOB-registered auditor. The current custody rule’s audit provision also allows for flexibility and efficiency in auditing different types of private fund clients, both domestic and foreign. Moreover, I believe that the proposal is biased against cryptocurrencies. These are innovative and legitimate client assets that offer many benefits for investors and advisers alike. Cryptocurrencies are digital currencies that operate on blockchain technology. They are decentralized, transparent, secure, fast, and low-cost. They have gained widespread acceptance and adoption by millions of users around the world, including some of my private fund clients who prefer them over traditional fiat currencies or other assets. Cryptocurrencies are not subject to the control or manipulation of any central authority, and they allow for greater financial inclusion and empowerment of individuals and communities. However, the proposal would make it very difficult, if not impossible, for me to advise my clients on cryptocurrencies or to hold them in custody on their behalf. The proposal would require me to use a qualified custodian that meets the SEC’s standards, which may not exist or be available for cryptocurrencies. The proposal would also subject me to a surprise examination by an independent public accountant, which may not be feasible or appropriate for cryptocurrencies, given their unique nature and characteristics. The proposal would also force me to comply with the audit provision of the proposed rule, which may not be compatible with the accounting and reporting standards for cryptocurrencies. The proposal would effectively exclude me and my clients from participating in the cryptocurrency market, which is unfair and detrimental to our interests. Therefore, I respectfully request that you reconsider the proposed rule 223-1 and retain the current custody rule unchanged. I believe that this would be in the best interest of both investment advisers and their clients, and that it would respect the diversity and innovation of our client assets. Thank you for your attention and consideration. Sincerely, cryptoenthusiasts369