Oct. 22, 2023
Dear Securities and Exchange Commission, I am writing to express my concerns regarding the proposed rule on "Safeguarding Advisory Client Assets." While I understand the importance of enhancing investor protections and addressing gaps in the custody rule, there are several areas of the proposal that require further consideration and clarification. Specifically, my concerns surround the lack of clarity on the definition of digital assets and the potential implications for the investment advisory industry. The proposed rule aims to address the safeguarding of client assets, including discretionary authority in custody and exceptions for specific situations. However, there is a significant lack of clear guidance on what constitutes a digital asset. In today's financial landscape, digital assets like cryptocurrency have emerged as a transformative force in finance. Yet, the rapid development of these assets and the regulatory uncertainties surrounding them have presented challenges for both regulators and market participants. Without a clear definition of digital assets, there is a risk of confusion and potential misinterpretation, which could lead to inconsistent implementation and compliance difficulties for investment advisers. The lack of clarity may also hinder investor protection efforts, as advisers grapple with how to appropriately safeguard these digital assets. Furthermore, there is a need to address the unique challenges posed by digital assets, such as crypto assets. While the proposal acknowledges the application of the rule to crypto assets, it falls short in providing detailed guidance on how investment advisers can effectively safeguard these assets. Given the decentralized and complex nature of crypto assets, demonstrating exclusive control has been a challenge for investment advisers. Without adequate guidance in the proposal, investment advisers may face difficulties in complying with custody rule requirements, thereby potentially putting client assets at risk. To resolve these concerns, I urge the SEC to collaborate with industry stakeholders and experts to develop a more comprehensive and tailored approach to regulating digital assets. This collaboration should focus on establishing clear definitions, guidelines, and regulatory frameworks that effectively address the unique characteristics and challenges of digital assets. By doing so, the SEC can strike a balance between investor protections and fostering innovation in the financial sector. Additionally, I encourage the SEC to consider the potential economic impacts of the proposed rule. While the goal of enhancing investor protections is commendable, it is essential to assess the potential costs and benefits for the investment advisory industry as a whole. Compliance costs and the overall burden on investment advisers should be carefully evaluated to ensure that the proposed rule does not unduly hamper competition or hinder capital formation. In conclusion, the proposed rule on "Safeguarding Advisory Client Assets" is a step in the right direction towards enhancing investor protections. However, it is crucial to address the lack of clarity on the definition of digital assets and provide clearer guidance on safeguarding these assets, particularly in the context of crypto assets. By doing so, the SEC can strike the right balance between investor protections and facilitating innovation in the digital asset space. Thank you for considering my concerns. I look forward to seeing a revised proposal that addresses these issues and provides greater clarity for investment advisers and market participants. Sincerely, Josué Naranjo