The US Securities and Exchange Commission (SEC) is currently reassessing a proposed rule that would impose stricter custody requirements on investment advisers holding crypto and other assets. The acting SEC Chair, Mark Uyeda, mentioned during the “Investment Management Conference” in San Diego that the agency is considering whether to amend or rescind the rule that was introduced under the previous administration.
The initial proposal, which was supported by former SEC chair Gary Gensler, aimed to enhance investor protection by ensuring that investment advisers properly safeguard client assets. One of the key aspects of the proposal was to restrict qualified custodians to federally chartered entities. Gensler emphasized the importance of preventing asset misuse or loss through this rule.
However, Uyeda highlighted that there have been public comments criticizing the broad scope of the rule, leading the agency to rethink its approach. Former Chair of the House Financial Services Committee, Patrick McHenry, raised concerns in a comment letter in May 2023, stating that the rule could be detrimental to crypto firms. McHenry pointed out that federally chartered banks were being discouraged from custodying assets from crypto-related companies, leaving the industry without adequate custody solutions.
The SEC is now shifting its regulatory priorities towards developing measures that align with statutory authority while also focusing on cost efficiency and effectiveness. Uyeda also addressed another regulatory change that required mutual and exchange-traded funds (ETFs) to report monthly rather than quarterly portfolio holdings. This rule, implemented in August under Gensler, aimed to enhance market transparency. However, concerns regarding compliance costs and risks associated with AI-driven data analysis have been raised, prompting the SEC to explore potential adjustments to the rule, including extending the compliance deadline.
In addition, Uyeda emphasized the importance of revising small-entity definitions to appropriately calibrate regulatory burdens. The regulator is refining its procedures for assessing economic impacts, legal and compliance costs, and other professional expenses related to its rulemaking. Uyeda stressed that safeguarding client assets, fund disclosures, and digital engagement practices, such as predictive data analytics, continue to be areas of regulatory focus.
Overall, the SEC’s reconsideration of the custody rule and its shift in regulatory priorities demonstrate a commitment to balancing investor protection with industry needs in the ever-evolving landscape of crypto and asset management.