Custody Rules Used by Investment Advisory Firms
The U.S. Securities and Exchange Commission (SEC) today proposed a rule requiring registered investment advisers to store crypto assets (virtual currencies) with qualified custodians.
SEC Chairman Gary Gensler said the proposal would “cover all cryptocurrencies, including those currently considered funds and securities, and those that are not funds or securities.”
It goes on to say that depending on how a cryptocurrency platform operates, it may not be trusted as an eligible custodian. Although there are eligible custodians among cryptocurrency companies, it suggests that some cryptocurrency companies may be deemed ineligible.
There is a 60-day period for comments on the proposal.
A Registered Investment Advisor (RIA) is a company in the United States subject to custody rules that require it to deposit assets with a qualified custodian, such as a bank or broker-dealer.
RIAs are firms that provide securities investment advice and portfolio management to clients and are registered with the SEC or state securities regulators. These companies have a fiduciary duty to put the interests of their clients first.
What is custody
Refers to holding and managing assets on behalf of investors. A term widely used for assets other than virtual currency. It refers to a service that performs a wide range of operations, such as asset custody, settlement related to trading, receipt of principal and interest, dividends, and exercise of voting rights. A company that performs custody is called a custodian.
The bankruptcy of FTX is also a background
The SEC voted 4 to 1 to propose this rule.
Commissioner Caroline Crenshaw supported the proposed rule, citing concerns that many cryptocurrencies are not properly stored or protected today. Recent events in the cryptocurrency market have made it clear that investors can suffer huge losses if their assets are not properly protected.
Gensler also commented, “We support this proposal to ensure that investment advisors do not improperly use, lose or abuse investor assets.”
Behind these remarks is the turmoil in the cryptocurrency market that occurred in 2022, especially the collapse of the major cryptocurrency exchange FTX. It has been revealed that FTX illegally diverted customer funds to group company Alameda Research.
connection: Severe shock in the virtual currency market, summary of Alameda shock and FTX turmoil
Voted against, meanwhile, by commissioner Hester Peirce, known as the “Crypto Mom” who supports cryptocurrencies.
Peirce said he feared the new rules would “reduce the number of eligible custodians,” which could in turn put crypto investors at greater risk of theft and fraud.
Another busy morning. We’ve now dug through the @SECGov proposed rulemaking and I’m glad to see the SEC recognizes Coinbase Custody Trust Co. as a qualified custodian, and after today’s SEC proposed rulemaking, we are confident that it will remain a qualified custodian.
— paulgrewal.eth (@iampaulgrewal) February 15, 2023
Regarding the SEC’s proposal, Paul Grewal, chief legal officer of cryptocurrency exchange Coinbase, said, “Coinbase’s custody service is now recognized by the SEC as an eligible custodian and will likely remain so even if the new rules are implemented. I am confident it will continue,” he said. He supports aspects of the proposal that extend customer protection.
Jason Gottlieb of law firm Morrison Cohen said while he appreciated the increased protection of client assets, “the problem is that we don’t yet know if the rule will be compliant.” .
If the SEC does not clearly indicate how eligible custodians can hold cryptocurrencies, investment advisors may have trouble deciding where to deposit cryptocurrencies.
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