Oct. 22, 2023
Jamie Swift [REDACTED] Sun 22 Oct Securities and Exchange Commission 100 F Street NE Washington, DC 20549 Subject: Public Comment - Safeguarding Advisory Client Assets To Whom It May Concern, I am writing to express my concerns and provide feedback on the proposed rule "Safeguarding Advisory Client Assets" (File Number [insert file number]) issued by the Securities and Exchange Commission (SEC). While I acknowledge the importance of investor protection and the need to address gaps in the custody rule, I believe there are certain aspects of the proposed rule that require further consideration and revision to strike a fair balance between safeguarding client assets and minimizing unintended consequences. I. Discussion A. Scope of Rule The expansion of the coverage to include a broader range of investments held in a client's account is a critical step in enhancing investor protections. However, it is essential to ensure that the definition of assets is comprehensive and flexible, enabling future technological advancements and emerging investment instruments to be adequately addressed. Given the dynamic nature of the financial industry, the SEC should continuously evaluate and update the definition to prevent regulatory gaps. B. Qualified Custodian Protections As the rule considers the applicability to crypto assets, it is crucial to address the challenges involved in demonstrating exclusive control over such assets. The innovative nature of cryptocurrencies requires a nuanced approach to ensure investor protection without stifling technological advancements or impeding market growth. Clarification regarding the indicators of exclusive control and practical solutions for safeguarding crypto assets would benefit both investors and industry participants. C. Certain Assets Unable to be Maintained with a Qualified Custodian The proposed rule rightly acknowledges that certain assets cannot be maintained with a qualified custodian while emphasizing the need for enhanced recordkeeping, separation of duties, and regular reviews. To prevent the risk of abuse or unauthorized transfers, prudent measures such as thorough audits and strong internal controls should be implemented, especially for non-traditional assets. Additionally, the SEC should consider providing further guidance on safeguards specific to unconventional investment vehicles. D. Segregation of Client Assets The proposed rule's intention to ensure segregation of client assets is commendable, as it strengthens investor confidence. However, stakeholders have expressed concerns regarding potential practical challenges and unintended consequences. The SEC should engage in thorough consultation with industry experts and take into consideration the implications of mandating strict segregation for certain investment strategies that may not fit within the traditional client segregation framework. E. Investment Adviser Delivery of Notice to Clients The requirement for advisers to notify clients when opening an account with a custodian is an essential step in enhancing transparency and accountability. However, the rule should clarify whether electronic notifications, with appropriate safeguards to ensure receipt and retention, would be permissible. This would not only promote efficiency but also align with the current trend towards digital communication in the financial industry. F. Amendments to the Surprise Examination Requirement The proposed changes regarding surprise examinations align with the goal of safeguarding client assets. The inclusion of a written agreement with an independent public accountant enhances the effectiveness of surprise examinations. However, to minimize undue burden on smaller investment advisers, the SEC should consider flexible alternatives that maintain the objective of safeguarding client assets without imposing excessive compliance costs. G. Exceptions from the Surprise Examination While exceptions are provided for advisers with discretionary authority or custody solely due to a standing letter of authorization (SLOA), it is crucial to ensure that these exceptions do not create unnecessary gaps in client asset protection. The SEC must carefully consider the criteria for qualifying exemptions to strike a balance between reducing regulatory burdens and adequately safeguarding client assets. H. Amendments to the Investment Adviser Recordkeeping Rule The proposed amendments to the investment adviser recordkeeping rule are crucial to improving oversight and investor protection. However, to ensure efficient compliance, the SEC should consider technological advancements, such as leveraging distributed ledger technology or blockchain, which could provide enhanced transparency, security, and efficiency in recordkeeping. I. Changes to Form ADV The proposed changes to Form ADV are essential in enhancing transparency and regulatory oversight. The requirement to report custody of client assets and information about custodians and accountants involved in safeguarding assets would provide stakeholders with valuable information. However, to avoid excessive burden, the SEC should consider streamlining and rationalizing the reporting requirements, focusing on essential information that contributes to investor protection and systemic risk monitoring. II. Economic Analysis The economic analysis provided by the SEC demonstrates a comprehensive understanding of the benefits and costs associated with the proposed rule. Nevertheless, it is essential to consider the broader economic implications beyond direct measures of compliance costs and burden. B. Broad Economic Considerations While the proposed rule aims to mitigate principal-agent problems and market failures, the SEC should also consider the potential indirect economic effects on competition, capital formation, and innovation in the investment advisory industry. Striking a balance between enhancing investor protection and supporting economic growth is crucial for ensuring a healthy and dynamic financial marketplace. C. Baseline Given the significant amount of client assets under custody, which was reported at $45.56 trillion, it is evident that safeguarding client assets is of utmost importance. Considering the potential grand-scale implications of any oversight or loopholes in the rule, it is crucial to implement robust measures without unduly burdening investment advisers. III. Consideration of Impact on Nonhuman Species While the proposed rule predominantly addresses investor protection and regulatory oversight, it is important to consider the potential unintended consequences for nonhuman species and ecosystems. As society becomes increasingly aware of the interdependence between human actions and biodiversity, regulators must take steps to ensure that their rules do not inadvertently harm wildlife or disrupt ecological balances. I encourage the SEC to conduct a comprehensive environmental impact assessment and consult with relevant experts to minimize any adverse impacts on nonhuman life forms. In conclusion, while I appreciate the SEC's efforts to enhance investor protections through the proposed rule "Safeguarding Advisory Client Assets," I believe it is essential to address the concerns and considerations highlighted above to achieve a well-balanced regulatory framework. Greater consultation with industry stakeholders, technological considerations, and holistic economic analyses would further strengthen the final rule and its effectiveness in safeguarding client assets while fostering a fair and competitive investment advisory industry. Thank you for considering my comments. I trust that you will give thorough consideration to these points and take steps to address the concerns raised. Should you require any additional information or clarification on any aspect, please do not hesitate to contact me. Sincerely, Jamie Swift Sent with Proton Mail secure email.