Oct. 29, 2023
Dear Securities and Exchange Commission, I am writing to express my concerns and opposition to the proposed rule "Safeguarding Advisory Client Assets." While I appreciate the SEC's efforts to enhance investor protections and address gaps in the custody rule, I believe there are several areas that require further consideration and revision. In particular, I find the inadequate consideration of the unique properties of cryptocurrency to be deeply concerning. Cryptocurrency, such as Bitcoin and Ethereum, operates on decentralized networks and utilizes cryptographic security measures. These characteristics make traditional custodial practices and the application of the proposed rule challenging and impractical. The SEC should recognize the technological complexities and the decentralized nature of cryptocurrency, and tailor the regulatory requirements accordingly. By imposing strict custody requirements on cryptocurrency assets, the proposed rule fails to account for the fact that investors can exercise exclusive control over their digital assets through private key management. Unlike traditional financial assets, cryptocurrency can be stored safely without the involvement of intermediaries or qualified custodians. It is essential for the SEC to develop a nuanced and pragmatic approach that allows for the unique nature of cryptocurrency while ensuring investor protection. Furthermore, I am concerned about the significant compliance costs that investment advisers would incur to comply with the proposed rule. The SEC's economic analysis acknowledges the inherent difficulties in estimating these costs due to varying practices among investment advisers. It is crucial that the SEC conducts a comprehensive analysis of the economic effects and assesses the potential impact on market competition, advisory services, and capital formation. Moreover, the proposed rule fails to provide clear guidance on how investment advisers can safeguard assets that cannot be maintained with a qualified custodian. While the rule requires enhanced recordkeeping, separation of duties, and regular reviews, it lacks specific guidelines that could ensure the protection of client assets held in unconventional, but secure, forms. Additionally, the proposed rule's amendments to the surprise examination requirement and recordkeeping obligations place a considerable burden on investment advisers. While I recognize the importance of these provisions in safeguarding client assets, there needs to be a balance between protecting investors and imposing excessive compliance costs on investment advisers. The SEC should consider reasonable alternatives that achieve the objective without unduly burdening the industry. Furthermore, the one-year transition period proposed by the SEC may not be sufficient for investment advisers, especially smaller entities, to fully comply with the new rule. Given the complexity and significance of the amendments, a more flexible and gradual implementation approach could alleviate the potential challenges faced by investment advisers, particularly those of lesser scale. In conclusion, I urge the SEC to reconsider and revise the proposed rule to better address the unique properties and challenges posed by cryptocurrency. The SEC should take into account the decentralized nature of these assets and develop a framework that facilitates innovation and technological advancements in the industry while upholding investor protection. Additionally, a thorough and comprehensive examination of the economic impacts and a balanced approach to compliance requirements are crucial to strike a fair balance between safeguarding investor assets and enabling efficient market practices. Thank you for considering my comments. I trust that the SEC will carefully consider the concerns raised by stakeholders and work towards implementing a regulatory framework that achieves the intended protective outcomes while allowing for continued innovation in the advisory industry. Sincerely, Phil Lawrence