SEC pushes for tougher custody rules on assets, including crypto

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Wall Street’s top regulator has proposed beefing up safeguards around investors’ assets after the collapse of several high-profile crypto firms last year revealed client funds weren’t as safe as advertised .

The U.S. Securities and Exchange Commission agreed on Wednesday to propose rules that would require investment advisers to secure all client assets they manage, including so-called alternatives, such as cryptocurrencies and cryptocurrencies. art, with qualified dealers.

The planned crackdown on custody follows a series of failures in digital asset markets. Companies promoted segregated and segregated funds, only for consumers to find out during a bankruptcy that their holdings were being treated as unsecured assets and part of the estate of the collapsed company.

While the SEC’s proposed custody rules are designed to cover all assets, most discussion has focused on how they would apply to crypto.

Although some crypto trading and lending platforms may claim custody of crypto investors, that does not mean they are qualified custodians, SEC Chairman Gary Gensler said in remarks introducing the proposal. [This] The proposal, by covering all asset classes, would cover all crypto assets, including those that are currently covered as funds and securities and those that are not funds or securities.

Seeking to broaden the scope of existing rules, the SEC is leveraging powers granted to it in 2010 following the Bernard Madoff scandal, when it was discovered that the fraudster’s clients had lost billions in what was made a Ponzi scheme.

The proposals come after a year of acute turbulence for crypto markets, which left millions of creditors lining up in bankruptcy court following the breakup of groups including lending platform Celsius and exchange FTX. . Many crypto exchanges act as custodians of client assets, but also borrow and lend assets to clients. Some of FTX’s former managers have been accused of embezzling client funds.

Under the proposed rule, investment advisers would have to draft written agreements with qualified custodians to ensure the segregation and protection of client assets in the event of the custodian’s bankruptcy. Qualified custodians are generally highly regulated financial groups such as banks, brokers and trust companies.

The proposal was backed by four of the five SEC commissioners and will now be subject to public comment as well as a second vote before any implementation.

Earlier in its meeting, the SEC finalized rules that will halve the two-day window for settlement of stock trades, a move that gained urgency after brokers such as Robinhood were rocked by a surge in trading. trading during the meme stock frenzy of 2021.

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Then the need for brokers to post additional collateral with clearinghouses to cover settlement risk has been cited as a spur in their controversial decisions to limit clients’ ability to buy certain in-demand stocks.

Market makers and brokers have argued that the current two-day window poses risks to the financial system. In times of volatility, clearinghouses that stand between buyers and sellers may require more margin, or insurance, to cover any trade failure.

The vote on the rule passed with the support of three of the five commissioners. Two, Hester Peirce and Mark Uyeda, voted against the measure after raising concerns that its May 2024 deadline was too tight to allow all systems to be fully tested.

Several industry participants had argued for the switchover to occur in September 2024 to coincide with Canada’s plans to do the same.

We appreciate the commission finalizing its rule to provide certainty, but we strongly disagree with the May 2024 implementation date, said Kenneth Bentsen, director of Sifma, the securities industry group.

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