The U.S. Securities and Exchange Commission (SEC) is reconsidering or potentially rescinding proposed regulations that would impose stricter custody requirements on investment advisers holding crypto and other assets. Acting SEC Chair Mark Uyeda revealed this shift in regulatory direction during an address at an investment industry conference in San Diego on Monday.
Uyeda, who temporarily leads the regulator, stated that the agency is working on potential amendments to the rule, which was introduced under former SEC Chair Gary Gensler during the Biden administration. The rule aimed to extend custody requirements for investment advisers to cover all client assets, including cryptocurrencies, ensuring that investment professionals adhere to stricter standards when safeguarding these holdings.
Regulatory Shift and Industry Concerns
“Given such concern, there may be significant challenges to proceeding with the original proposal. As such, I have asked the SEC staff to work closely with the crypto task force to consider appropriate alternatives, including its withdrawal,” Uyeda said.
The proposal, which required investment advisers to store clients’ digital assets with a qualified custodian, faced sharp criticism from industry players and regulatory opponents, including SEC Commissioner Hester Peirce. Critics argued that the rule was overly broad, potentially limiting investment opportunities in the growing digital asset space and increasing compliance burdens.
Gensler had previously defended the rule, stating that it was designed to protect investors from mismanagement, fraud, or the outright loss of their assets. He contended that crypto platforms did not meet the standards necessary to serve as qualified custodians, citing risks associated with these platforms’ operational structures.
Uyeda, however, signaled a stark contrast in approach from his predecessor, stating that the SEC “needs to prioritize effective and cost-efficient regulations that respect the limits of our statutory authority.” His remarks suggest that the agency is pivoting towards a regulatory philosophy that seeks to reduce unnecessary burdens on financial firms while still ensuring investor protection.
Changes to Fund Reporting Requirements
In addition to revisiting crypto custody rules, the SEC is also considering modifications to another contentious regulation that requires mutual and exchange-traded funds (ETFs) to report their portfolio holdings on a monthly rather than quarterly basis.
The rule, adopted in August under Gensler’s leadership, was intended to enhance transparency by providing more frequent disclosures to investors. However, Uyeda noted that concerns have arisen over the impact of artificial intelligence on financial markets, which some believe exacerbates the risks of more frequent reporting. As a result, the SEC may extend the compliance deadline and revise the rule’s scope.
This decision follows a wave of legal challenges from the financial industry against several rules introduced under Gensler’s tenure. Critics argue that the heightened reporting frequency places undue stress on asset managers and could inadvertently disadvantage investors.
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Industry Pushback and Political Divisions
Uyeda’s reassessment of the custody rule marks a divergence from the more aggressive regulatory stance taken during the Biden administration. He and Commissioner Peirce have long voiced concerns about the rule’s potential to constrain the digital asset market by making it more difficult for investment advisers to integrate cryptocurrencies into their clients’ portfolios.
“How could an adviser seeking to comply with this rule possibly invest client funds in crypto assets after reading this release?” Uyeda previously questioned, despite initially supporting the proposal with reservations.
Peirce, the only commissioner to vote against the rule, echoed similar concerns, arguing that it would simultaneously expand regulatory reach over crypto assets while limiting the number of firms qualified to serve as custodians.
Uyeda’s latest remarks come just days after he stated on March 10 that he had asked SEC staff to explore options for abandoning portions of a proposal that would require some cryptocurrency firms to register with the SEC as exchanges. Additionally, a Trump-era SEC rule known as SAB 121, which required financial firms holding cryptocurrencies to record them as liabilities on their balance sheets, has been scrapped.
The Broader Significance of the Regulatory Shift
These developments reflect a broader ideological shift in the SEC’s regulatory approach, particularly concerning the cryptocurrency sector and investment market oversight. The reconsideration of the custody rule highlights the ongoing tension between fostering innovation in financial markets and ensuring investor protection.
As digital assets continue to integrate into traditional finance, the debate over how to regulate them remains contentious. Gensler’s tenure saw an aggressive push for increased oversight, while Uyeda appears to be steering the SEC toward a more measured and industry-friendly approach.
