Asset managers and investors could face significantly high costs associated with the negotiation of custody agreements, following the SEC’s proposed changes to the Advisers Act custody rule, according to AIMA’s Global Head of Asset Management Regulation and Sound Practices, Jennifer Wood.
In addition, the cost of custodian services could increase if the liability of custodians is increased by regulation rather than being set at market levels through negotiation, she said.
Wood added that some current custodians, including foreign financial institutions and digital asset specialists, could struggle to meet new requirements causing some to leave the business entirely.
“While we support the SEC’s goal of safeguarding client assets, such a wide-ranging and technically complex proposal requires a longer consultation period to reduce the risk of unintended consequences,” she said.
“Together with our members, AIMA will be drawing on our expertise, gained through our sound practices work on the selection of custodians and digital asset custody guidance, to provide feedback that helps the Commission meet their stated goals in a way that allows investors access to assets and strategies they seek,” she added.
Kelvin To, Founder and President of Data Boiler Technologies, added that digital asset crash, FTX downfall in particular, has prompted the urgency for the SEC to do something about better oversight on custodian and discretionary trading of client assets.
He said that if adopted, “Assets” would mean ‘funds, securities… and include all other assets that investment advisers custody for their client. “Yet, “Howey” test may be the prevailing way in determining whether a particular asset is securities or not,” he argued.
“There are talks to regulate Crypto under Casino Rules instead of Securities Rules. It is political that different regulators are fighting over who should supervise what in digital asset,” To commented.
He told Traders Magazine that this administration of the SEC seems “aggressive in broadening their span of controls.”
He gave an example of the Proposed Investor Protections in CPSs and ATSs and Amendments to Exchange Act Rule 3b-16 regarding re-definition “Exchange” that go along with the proposed BestEx Rule 1100 where the term ‘market’ is expansive.
“Similarly, the proposed Safeguarding Rule would extend the arm to regulate custodian indirectly, including but not limited to, a registered futures commission merchant and certain foreign financial institutions (“FFI”),” he said.
According to To, some custody platforms operate outside of the U.S. jurisdiction’s regulatory perimeter or are not in compliance.
This presents the potential for concentration of risks, as well as underscores the lack of transparency on their activities,” he said.
To added that there could be maturity and liquidity mismatches underpin its structure that similar to money market funds.
“One would hope the Commission will find an effective and efficient ways to detect, provide early warnings, and curb misappropriation of client assets before anything bad happens,” he said.
“The larger firms may have wider “shoulders” to bear the burden through big law or consulting firms. Heighten compliance requirements in the beautified name of “investor protection” may indeed be bad policies for an uneven playing field hurting the smaller players,” he concluded.
