Joint Comments on the SEC's Safeguarding Proposal

Dear Chair Gensler:

We write to express our strong concerns regarding the U.S. Securities and Exchange Commission's (the Commission) proposed rule, Safeguarding Advisory Client Assets (the Proposal). We support the Commission's goal of ensuring high levels of investor protection, including the safety of client assets from potential misuse or loss. However, in its current form, the Proposal is in conflict with that goal as it will result in a myriad of negative impacts on investors including their access to various services, assets, and markets with well-established rules and procedures.

As such, we strongly urge the Commission not to adopt the Proposal in its current form. Further, we urge the Commission to gain a better understanding of the current custodial framework. Where the Commission can identify shortcomings that have failed to protect investors from loss or misappropriation of traditional assets, it should propose changes, based on a careful evaluation of the issues identified by commenters, that target any gaps in the current custodial framework while preserving that framework's many strengths. If those changes represent a material change from the approach in the Proposal, the Commission should withdraw and re-propose the Proposal. Finalizing a new rule of which significant portions have been materially changed from the version as proposed would deny the public the opportunity to provide invaluable feedback on those changes and deprive the Commission of the benefits of any such feedback, consequences that would undermine the integrity and quality of our securities markets and the regulations that govern them.

The Proposal makes four fundamental changes to today's well-established and demonstrably effective custody framework without a clear policy rationale. First, it would compel qualified custodians to segregate client assets, including cash deposits, variation margin, and contractual obligations, in a manner that is at odds with the existing regulatory frameworks that cover the related institutions and instruments. Second, it would create an overly broad definition of "custody" that includes many adviser practices that are already heavily regulated, resulting in unnecessary burden and inefficiency. Third, it would expand the existing custody rule's application from "funds and securities" to all positions held in a client account, including loans, derivatives, and other financial contracts held for investment purposes and physical assets, such as physical commodities, real estate, artwork, and precious metals. Fourth, it would compel advisers to enter into contractual agreements with clients custodians and would impose on those custodians a host of new commercial and operational requirements that may be impossible to fulfill and will disrupt today's system that works well.

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