US Securities and Exchange Commission (SEC) Chairman Gary Gensler spoke on March 2 at a meeting of the commission’s Investor Advisory Committee on the issue of asset custody. The committee has a proposed rule for investment advisers on safeguarding investor assets. It was Gensler’s second intervention on the proposed rule. The first was in mid-February, when the standard was first proposed.
The current custody rule, which dates from 2009, covers “a significant number of crypto assets” and was designed to reduce the risk of advisers embarking on Ponzi schemes. The new rule expands safeguards to all asset classes, including crypto assets that are not funds or securities, and would enhance the protections provided by qualified custodians, in light of new powers granted by Congress in 2010, Gensler said.
The proposed rule would also require written agreements between advisors and custodians, add requirements for foreign institutions acting as custodians, and explicitly extend safeguard rules to discretionary trading.
Investment advisers, he continued, cannot rely on cryptocurrency platforms to perform custodial functions. And he added:
“Just because a cryptocurrency trading platform claims to be a qualified custodian does not mean that it is. When these platforms fail […] Investor assets have often become the property of the bankrupt company, leaving investors in the bankruptcy court queue.”
To be a “qualified” custodian under the new rule, a company would have to ensure all assets are properly segregated, undergo annual audits by public accountants and take other transparency measures.
#BREAKING: US SEC Chair Gary Gensler says crypto exchanges are not qualified custodians for investors assets.
⚠️ Says they can’t be relied upon & must be highly scrutinized.
Calls for Congress to grant change to custody rule. pic.twitter.com/tZ8zNSGkDS
— The Roundtable Show (@RoundtableSpace) March 2, 2023
SEC Commissioner Hester Peirce opposed the rule. She argued in a statement that the new rule would “encourage investment advisers to immediately back off advising their clients regarding cryptocurrencies.”
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