Major US crypto exchange Coinbase is opposing the US Securities and Exchange Commission’s (SEC) new rule proposal regarding registered investment advisers (RIAs) and qualified custodians (QC).
In March, the SEC published a proposal that, if passed, would require all client assets held by an investment advisor to be held in custody by a qualified custodian.
Currently that requirement already exists for RIAs that handle client money and securities, the SEC’s proposal would simply extend it to other assets such as crypto.
Paul Grewal, Coinbase’s chief legal officer, commented on the proposal on Monday, to argue the possible rule change is “misplaced” and could be improved.
“It is worth reiterating that we generally agree with the spirit of the proposal, and we are already complying with many of the new requirements – and we are confident that Coinbase Custody Trust Company will continue to be a QC, even if the proposal is adopted as is.
That said, like other recent SEC actions, this proposal unnecessarily highlights crypto and makes inappropriate assumptions about custody practices based on securities markets. Our comments explain our views in detail – a few highlights below.
First, the SEC must continue to define state trust companies and other state-regulated financial institutions as KCs. This works well today, so there’s no reason to upset the long-standing policies of Congress and the SEC.
Second, the proposal would ban RIAs from trading on non-QC crypto exchanges. This would not benefit RIAs or their clients and even harm them. So the SEC should allow limited non-QC exposure so that RIAs can trade crypto for their clients.
Third, to avoid disrupting existing and working commercial realities between custodians and their clients, the SEC’s rule should align standards of care by asset class and client type and allow sophisticated clients to negotiate their own contracts.
SEC Chairman Gary Gensler says the proposal would ensure that advisers do not inappropriately jeopardize their investors’ assets.
“In particular, Congress gave us authority to extend the advisor custody rule to all assets, not just funds or securities. Investors would benefit from the amendments to the proposal to improve the protection afforded by qualified depositaries. Thus, this expanded custody rule would provide investors working with advisors with the time-tested protection they deserve for all of their assets, including crypto assets, in line with what Congress envisioned.”
Earlier this year, Coinbase received a Wells Notice from the SEC warning of a possible enforcement action against the company for allegedly violating securities laws.
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