SEC Wants Enhanced Protections on Crypto, Other Adviser-Managed Investments

The proposed changes would amend a custodial rule requiring cryptocurrency exchanges to be run by qualified custodians.


The Securities and Exchange Commission on Wednesday proposed rule changes to enhance protections of customer assets managed by registered investment advisers, including cryptocurrency investments.

The changes seek to amend the so-called “custody rule” under the Investment Advisers Act of 1940 to safeguard against what the SEC identifies as a “general reduction in the level of protections offered by custodians,” according to the proposed rule. The SEC also cited “significant developments” in crypto-asset trading through blockchain technology that, while efficient, creates regulatory risks to investors.

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“Unlike mechanisms used to transact in more traditional assets, this technology generally requires the use of public and private cryptographic key pairings, resulting in the inability to restore or recover many crypto assets in the event the keys are lost, forgotten, misappropriated, or destroyed,” the SEC proposal states. “These specific characteristics could leave advisory clients without meaningful recourse to reverse erroneous or fraudulent transactions.”

Although the 434-page document does not name the failed cryptocurrency exchange FTX by name, regulators such as the SEC and Commodity Futures Trading Commission have called for regulatory action to safeguard investors and the markets from another multi-billion-dollar collapse.

“The proposed changes are intended to help ensure that qualified custodians provide certain standard custodial protections when maintaining an advisory client’s assets,” the SEC proposal states. “These protections are designed, among other things, to ensure client assets are properly segregated and held in accounts to protect the assets in the event of a qualified custodian bankruptcy or other insolvency.”

Alternative Investments

Before the FTX collapse that led to a Chapter 11 bankruptcy filing in November 2022, retirement industry recordkeepers Fidelity Investments and ForUsAll had started offering retirement savers access to cryptocurrency investments in their defined contribution retirement plans. Fidelity offers investment in bitcoin through the core retirement plan lineup. ForUsAll offers access through the self-directed brokerage window to an exchange called Coinbase Institutional.

According to the proposal, cryptocurrency and other RIA-led investments would need to be managed by qualified custodians such as banks or savings associations, registered broker/dealers or foreign financial institutions. Coinbase, which runs Coinbase Institutional, announced that the SEC has recognized Coinbase Custody Trust Co. as a qualified custodian and that the proposed rulemaking will not change that designation.

“We fully agree investors deserve to feel confident their assets are safe—as a reminder, our clients’ assets are segregated and secured,” Paul Grewal, Coinbase’s chief legal officer, said in a statement. “We support the Commission’s efforts to provide all investors with the protections already available to CCTC clients.”

ForUsAll did not immediately respond to a request for comment.

Early Response

The general counsel for the Investment Adviser Association, Gail Bernstein, says her organization is still delving into the proposal. Bernstein’s initial response was that the rule would be a “major departure from how the rule” discretionary advice is currently treated from advisers and will encompass all authorized adviser trading on behalf of a client.

The IAA, which represents fiduciary investment advisers, noted that safeguarding client assets is of paramount importance and in need of modernization, but Bernstein said care must be taken on how to get there.

“The proposal expands the reach of the rule well beyond what it is today,” Bernstein writes via email. “It will expand from covering a client’s funds and securities to include all assets in a client’s portfolio with an adviser, like crypto, derivatives, real estate and more.” 

The SEC’s comment period on the proposal will remain open for 60 days following publication of the proposal in the Federal Register.

Retirement Industry Pushes Back on SEC Swing Pricing Proposal

Industry groups filed arguments saying the proposal, intended to put greater burden on “first mover” traders of open-ended funds, would actually hurt everyday workers and retirees.


Retirement and investing associations have responded to the Securities and Exchange Commission’s proposed rule on “swing pricing” that would upend decades’ worth of investing and trading practices for mutual funds.

On Tuesday, industry association responses flooded in arguing that the proposal published in November 2022 for open-ended funds to include mutual funds—though excluding money market funds and exchange-traded funds—would disadvantage everyday retirement savers in both their investment outcomes and short-term-withdrawal needs.

The SEC’s proposed swing pricing method, which is widely used in Europe, allows fund managers to adjust the net asset value of a fund to account for trading costs. That, in turn, passes those costs on to “first mover” traders instead of pushing them to existing fundholders and potentially diluting their holdings. Implementing the method would also require a “hard close” for open-ended funds to ensure that the managers receive trade information in time to adjust their net asset values.

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The proposal comes after the COVID-19 market panic caused a “fire sale” that benefitted first mover trades when investors sold off some $100 billion from corporate bond mutual funds, according to an analysis by the Brookings Institution. But many retirement, insurance and investment associations see the proposal as bringing widespread disruption to a mutual fund market that accounts for 61% of 401(k) retirement plan assets, according to data from the Investment Company Institute.

The proposal, according to organizations including ICI, would alter how mutual funds are managed, priced, bought and sold, increasing costs and decreasing the benefit of mutual funds for “more than 100 million Americans.”

“The SEC’s unworkable and costly proposal would severely damage these funds, targeting middle-class Americans and making it harder for families to achieve their financial goals,” wrote the ICI, which represents regulated investment fund firms.

The Washington, D.C.-based institute also argued that the daily dilution of U.S. mutual funds is relatively small—at an average of hundredths or tenths of a basis point per day—meaning the risks do not support the SEC’s overarching mandate.

A Hard No

The ERISA Industry Committee, a national advocacy group for retirement, health and benefit providers, argued that the rule would require retirement plan recordkeepers to create an earlier time for plan participants to submit orders and could delay requested distributions. Washington, D.C.-based ERIC also said the timing mandates would create expensive changes to recordkeeper technology and processes that might pass through to participants as higher costs.

“The SEC should abandon its ill-considered proposal because it would hurt workers and retirees that participate in 401(k) plans,” Andy Banducci, senior vice president of retirement and compensation policy for ERIC, wrote in the letter. “To implement it, employers and service providers would need to make costly changes and plan participants would have to submit orders earlier than others in the marketplace.”

The SPARK Institute, which represents retirement plan service providers and investment managers, argued that the rule would make everyday retirement plan transactions—such as purchases, loans and required minimum distributions—difficult, if not impossible, to execute.

“This proposal establishes an order for processing trades, with large institutional investors going first and everyone else going second,” Tim Rouse, the executive director of SPARK, wrote in a letter. “This would mean retirement savers will have much earlier trade processing cut-offs. And it’s likely that their trades will end up getting delayed by a full day. This will disadvantage—and confuse—many retirement investors who rely on prompt and transparent account transactions.”

The Securities Industry and Financial Markets Association’s Asset Management Group argued against the hard close proposal, but acknowledged that a more “flexible, non-mandatory form of swing pricing” may work to address the dilution issue for shareholders.

“If the commission is committed to the wide adoption of swing pricing as a liquidity risk management tool in the U.S., we urge the commission to provide managers with the flexibility to implement swing pricing based on those factors specific to each fund and not at prescribed thresholds that unduly rely on what would be, at best, low confidence estimates of market impact costs,” the New York-based SIFMA AMG wrote.

Other letters opposing the proposal came from fund and annuity providers including AllianceBernstein, Nationwide Financial , Putnam Investments, PIMCO, Brighthouse Financial and Prudential Investments.

Swinging for the Fences

The SEC’s proposal did get letters of support from some academic institutions and industry organizations. The University of Pennsylvania’s Wharton School, as well as Columbia University’s Columbia Business School, argued that swing pricing would actually reduce the amount of liquidity mutual funds would need to hold to meet redemption requests. This would allow more assets to be put to work in investments and “help investors achieve their long-term savings goals.”

The CFA Institute, a nonprofit providing financial profession education and certification, supported the proposal on the grounds that swing pricing would protect shareholders from costs created by first mover trades.

“The absence of swing pricing in the U.S. stems from a combination of factors, including operational challenges, fear of stigma, and collective action problems,” the CFA wrote. “This situation justifies commission action to mandate swing pricing in the overall interest of mutual funds and their shareholders. In doing so, the commission will be fulfilling two elements of its three-part mission: to protect investors and to maintain fair, orderly, and efficient markets.”

There were more than 150 comments submitted ahead of Tuesday’s deadline, according to the SEC’s website.

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