Oct. 29, 2023
Esteemed Chair Gensler, I take this opportunity to convey my profound concerns and objections concerning the U.S. Securities and Exchange Commission's proposed rule, denominated "Safeguarding Advisory Client Assets" (Release No. IA-6240, February 15, 2023). My concerns are rooted in a thorough analysis and multiple perspectives, which underscore potential deleterious effects and overarching concerns this proposal may engender across various segments of the U.S. financial markets. Unintended Regulatory Overreach and Interagency Cooperation: This proposal appears to unwittingly encroach upon entities regulated by the Commodity Futures Trading Commission (CFTC), which could inadvertently destabilize U.S. derivatives and commodities markets, imperiling the interests of American farmers and producers. The apparent absence of meaningful collaboration with the CFTC, the principal regulator of U.S. derivatives markets, is of particular concern, given the pivotal role these markets play in the American economic landscape, particularly in risk management and price discovery. Potential Disruption of Derivatives Markets and Advisory Client Access: The proposal may introduce disruptions within the realm of futures commission merchants, commodity trading advisors, commodity pool operators, and swap dealers, who are already subject to rigorous customer protection regulations under the aegis of the CFTC. Such perturbations might impair the ability of advisory clients to participate in swaps contracts, thereby challenging a decade of regulatory harmonization involving both domestic and international regulatory bodies. Implications for Commodity Markets: This proposal could adversely affect various commodity markets, spanning agricultural, energy, and digital commodities, as it imposes a verification process that some might argue is impractical and unworkable for each commodity transaction. The systemic implications of this approach for the broader U.S. economy merit our consideration. The Paradox of Investor Protection: While the aspiration to ensure high levels of investor protection is commendable, the existing form of this proposal appears to be at odds with this objective. It may yield multiple negative outcomes for investors, potentially restricting their access to well-established services, assets, and markets governed by established rules and procedures. Furthermore, the proposal introduces fundamental changes to the prevailing custody framework without a clear policy rationale, which could adversely impact a diverse array of investors and end users. Economic and Jurisdictional Considerations: The proposal departs significantly from conventional custody practices, notably augmenting the cost of offering custodial services and expanding the SEC's purview to regulate registered investment advisors (RIAs) as a means to oversee entities beyond its customary jurisdiction. The absence of a comprehensive economic analysis, coupled with the statement that certain economic effects remain unquantifiable due to a lack of information, may raise questions about the prudence of this regulatory endeavor. The Transformation of Custodial Practices and Implications for Digital Assets: This proposal contemplates a substantial transformation of traditional custodial practices, notwithstanding the historical penchant for custodians to engage in innovation and modernization. The asset-neutral approach and additional requirements have the potential to affect core functions of financial institutions, including cash holdings, and may engender adverse consequences for the digital asset ecosystem. Given the gravity of these concerns and their potential to affect a wide spectrum of sectors, I respectfully urge the Commission to reconsider this proposal. In my view, the regulatory framework of the CFTC serves to foster resilient markets that agriculture stakeholders and American businesses at large rely upon. Any proposal that impinges upon liquidity and customer protection within these markets should be approached with the utmost caution. Moreover, I strongly recommend that any future rulemaking endeavors be underpinned by a comprehensive economic analysis, one that captures all pertinent costs. Furthermore, it should be thoughtfully tailored to address specific instances where the current custody framework has demonstrably fallen short in safeguarding investors from potential losses or misappropriation of traditional assets. This process should be conducted in close consultation with the primary regulatory bodies overseeing the affected entities, markets, and financial instruments. I am deeply appreciative of the opportunity to proffer these comments and stand ready to engage in further discourse to explore alternative avenues that preserve robust investor protection without succumbing to the unintended consequences that this current proposal may entail. Thank you,