US securities regulators are proposing to expand custody obligations for investment advisers to increase investor protection, particularly when it comes to cryptocurrencies.
The U.S. Securities and Exchange Commission (SEC) has proposed changes to existing custody rules that, among other things, would expand advisors’ custody obligations beyond client funds and securities to include all client assets.
“These safeguards are intended, among other things, to ensure that customer assets are appropriately segregated and held in accounts to protect the assets in the event of a qualified custodian’s bankruptcy or other insolvency,” the SEC said in a statement.
The proposals would also tighten record-keeping requirements for advisers, strengthen protection for certain assets that cannot be overseen by a qualified custodian, and expand certain audit requirements.
“I support this proposal because using important powers granted to us by Congress after the financial crisis would help ensure that advisors do not misuse, lose or abuse investor assets,” SEC Chairman Gary Gensler said in a release.
These dangers were highlighted by the Madoff scandal, and recently crypto custody practices in the cryptocurrency sector have come under increased scrutiny.
Gensler noted that while some cryptocurrency trading platforms provide custody of customer assets, they are not qualified custodians.
“Instead of properly segregating investors’ cryptocurrencies, these platforms mixed these assets with their own cryptocurrencies or those of other investors,” he said. “When these platforms go bankrupt – as we have seen repeatedly recently – investors’ assets often become the property of the bankrupt company, leaving investors lining up in bankruptcy court.”
“Don’t be fooled,” he added. “Based on how crypto platforms generally operate, investment advisors cannot rely on them as qualified custodians.”
The new rule would also ensure that custody obligations apply to all crypto-assets, whether they are considered securities or not.
“With this expanded custody rule, investors working with advisors would receive the time-tested protection they deserve for all of their assets, including crypto assets, as Congress envisioned,” Gensler said.
However, the proposals have raised concerns among some commissioners, particularly when it comes to their application to cryptocurrencies.
“How could an advisor seeking to comply with this rule invest client funds in cryptocurrencies after reading this announcement?” Commissioner Mark Uyeda asked in a statement.
“This custody approach appears to mask a political decision to block access to cryptocurrencies as an asset class,” he said.
“Nevertheless, I prefer the discussion of cryptocurrencies in the context of notice-and-comment rulemaking rather than enforcement action,” he said. “For too long, the Commission’s approach to cryptocurrency regulation has been to use enforcement actions to introduce novel legal and regulatory theories.”
While Uyeda joined the majority in voting in favor of the proposed rule, Commissioner Hester Peirce opposed the rule, raising a number of concerns, including reservations about its potential impact on the cryptocurrency sector.
“Significant aspects of the proposed approach and the timetable for its implementation… raise such serious questions about the feasibility and scope of the provision that I cannot support today’s proposal,” she said.
The proposal will be open for comment for 60 days after publication in the Federal Register.
