Oct. 24, 2023
Securities and Exchange Commission 100 F Street, NE Washington, DC 20549 Subject: Public Comment on "Safeguarding Advisory Client Assets" Proposal Dear Sir/Madam, I am writing to provide my public comment on the proposed rule "Safeguarding Advisory Client Assets" (the Proposal) put forth by the Securities and Exchange Commission (SEC). I appreciate the opportunity to express my concerns and suggest improvements to the rule in order to enhance investor protections while promoting efficiency and clarity in the investment advisory industry. I. Introduction The Proposal aims to address the safeguarding of client assets by investment advisers. While the SEC's intentions to enhance investor protections and address gaps in the custody rule are commendable, there are certain aspects of the rule that require further consideration. In particular, I would like to address the confusion and burden created by the reporting requirements for participants in decentralized finance (DeFi). II. Discussion A. Scope of Rule The proposed rule expands the coverage to include a broader range of investments held in a client's account. However, the inclusion of reporting requirements for participants in DeFi creates confusion and imposes excessive burdens. The decentralized nature of DeFi platforms often involves multiple parties executing a transaction, leading to multiple, inconsistent, and duplicative reports. This not only undermines the efficiency and transparency of the DeFi space but also creates regulatory hurdles that may deter market participants from engaging in innovative financial technologies. B. Qualified Custodian Protections The Proposal recognizes the need to enhance the protection of client assets by addressing how investment advisers safeguard these assets. However, the application of the rule to crypto assets, which are an integral part of the DeFi ecosystem, requires clearer guidelines. Specifically, the challenges in demonstrating exclusive control in decentralized platforms need to be addressed to ensure effective compliance without excessive burdens for participants. C. Amendments to the Investment Adviser Recordkeeping Rule While the proposed amendments to the Investment Adviser Recordkeeping Rule are aimed at improving oversight and investor protection, the provisions should be tailored to reasonably accommodate the unique characteristics of DeFi platforms. Participants in the DeFi space abide by smart contracts and rely on on-chain transaction records, which may not conform to the traditional recordkeeping requirements. Flexibility in the rule should be considered to strike the right balance between investor protections, innovation, and compliance. III. Economic Analysis The SEC's economic analysis acknowledges the challenge of estimating the economic effects of the proposed rule due to varying practices among investment advisers. However, it is important to consider the potential unintended consequences of imposing burdensome reporting requirements on participants in DeFi platforms. The inefficiencies caused by such requirements may hinder capital formation and slow down innovation, ultimately adversely affecting economic growth and financial inclusivity. IV. Paperwork Reduction Act Analysis The SEC's estimates of the burdens and costs associated with the proposed rule are essential for understanding the potential impact on market participants. However, the estimates do not adequately capture the specific challenges faced by participants in decentralized platforms. Therefore, I encourage the Commission to conduct further assessment and dialogue with relevant stakeholders, including participants in the DeFi space, to ensure accurate and comprehensive estimations. V. Initial Regulatory Flexibility Analysis The proposed rule's impact on small entities, particularly those engaged in DeFi, deserves careful attention. The burdens associated with reporting requirements must be proportionate and tailored to accommodate the unique characteristics of these smaller market participants. Clarity and guidance in the rule should encourage innovation and competition, while upholding investor protection. VI. Consideration of Impact on the Economy While improving investor protections is crucial, regulatory actions should take into account the broader impact on the economy. Excessive burdens and unnecessary constraints on market participants, particularly those in the rapidly evolving DeFi industry, may stifle innovation and hinder economic growth. This should be carefully considered to strike a balance between oversight and fostering an environment conducive to innovation. VII. Conclusion In conclusion, I appreciate the SEC's efforts to enhance investor protections through the proposed "Safeguarding Advisory Client Assets" rule. However, particular attention should be paid to the reporting requirements for participants in decentralized finance. I urge the SEC to consider reasonable alternatives and engage in an ongoing dialogue with market participants to ensure a balanced regulatory framework that promotes investor protection, economic growth, and technological innovation. Thank you for considering my comments. I look forward to the SEC's continued commitment towards enhancing investor protections while promoting innovation in the investment advisory industry. Please feel free to reach out to me if you require any further clarification or have any questions regarding my comments. Sincerely, Ji Ahn