Lawmakers from the House Financial Services Committee, including Committee Chairman Patrick McHenry and Subcommittee Chairman French Hill, are urging the Securities and Exchange Commission (SEC) to withdraw its proposed rule that would increase the cost of custodial services for registered investment advisors (RIAs). The lawmakers argue that the rule goes against established practices and exceeds the SEC’s authority.
Concerns Over Increased Costs
One major concern raised by the lawmakers is the potential rise in costs associated with custodial services due to the proposed rule. They criticize the SEC for failing to provide a comprehensive economic analysis, which they believe shows a reckless approach to rulemaking. The lawmakers are demanding the SEC to reconsider its stance and withdraw the proposed rule.
Is This Beyond The SEC?
Another point of contention is the rule’s scope, which extends beyond the SEC’s statutory mandate. While the Dodd-Frank Act granted the SEC authority to ensure the safeguarding of client assets for RIAs within its jurisdiction, the proposed rule covers all types of assets, including unconventional ones. Lawmakers argue that this overreach undermines the authority of other regulators and imposes additional custody regulations on entities already regulated elsewhere.
Impact on the Digital Asset Market
The proposed rule’s impact on the digital asset market is another point of contention. Lawmakers are concerned about a proposal to limit qualified custodians to federally chartered entities, which they believe would stifle competition and favor established players in the banking sector.
Finding banks willing to provide custodial services for digital assets is already challenging, and limiting qualified custodians could exacerbate this issue. Lawmakers are concerned that established players will dominate the market and make it difficult for smaller players to compete, leading to reduced innovation and potentially higher costs for RIAs.
The SEC has also been criticized for not considering the implications of the proposed rule on the interaction with Staff Accounting Bulletin (SAB) 121. Lawmakers argue that the combined rules would burden custodian banks by requiring full indemnification of digital assets, holding them on balance sheets, and capitalizing against them. This onerous requirement could deter larger custodians, including public company banks, from offering custody services for digital assets.
SEC Slammed
Furthermore, the lawmakers criticize the SEC for not considering the implications of the proposed rule on the interaction with Staff Accounting Bulletin (SAB) 121. They argue that the combined rules would burden custodian banks by requiring full indemnification of digital assets, holding them on balance sheets, and capitalizing against them. This onerous requirement could deter larger custodians, including public company banks, from offering custody services for digital assets.
Conclusion
In conclusion, the SEC’s proposed rule has faced significant backlash from lawmakers who argue that the rule goes beyond the SEC’s jurisdictional boundaries and established practices. The impact on the digital asset market, in particular, has raised concerns about limiting qualified custodians to federally chartered entities and potentially stifling competition. It is essential that the SEC carefully considers the implications of its rulemaking and conducts a thorough economic analysis before implementing any changes to the regulations governing custodial services for RIAs.
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