SEC Considering Rules Around Asset Custody and Predictive Data Analytics

Investment advisers should be wary of cryptocurrency trading and lending platforms and predictive data analytics.

So said Securities and Exchange Commission (SEC) Chair Gary Gensler in prepared remarks for the SEC’s Investor Advisory Committee meeting held Thursday (March 2).

“Based upon how crypto trading and lending platforms generally operate, investment advisers cannot rely on them today as qualified custodians,” Gensler said in the prepared remarks. “To be clear: just because a crypto trading platform claims to be a qualified custodian doesn’t mean that it is. When these platforms fail — something we’ve seen time and again — investors’ assets often have become property of the failed company, leaving investors in line at the bankruptcy court.”

Gensler noted that the SEC proposed a new safeguarding rule for investment advisors on Feb. 15 that would expand the existing rule to cover all of an investor’s assets — not just funds or securities — but that the current rule already covers a significant amount of crypto assets and requires advisers to safeguard them with qualified custodians.

“The new proposed safeguarding rule — in addition to expanding the custody rule’s safeguards to cover all assets — would make important enhancements to the protections that qualified custodians provide,” Gensler said in his remarks.

Speaking of predictive data analytics, Gensler said there may be conflicts of interest inherent to advisers’ use of these tools because there are questions as to the interests for which the algorithms are optimized — the investor’s interests or the adviser’s.

“I believe this may lead to conflicts relating to how they use predictive data analytics and individually tailored investment engagement,” Gensler said in his remarks. “Thus, I’ve asked the staff to recommend how we might potentially address these inherent conflicts through rulemaking or otherwise.”

As PYMNTS reported in March 2022, when predictive data analytics, differential marketing and behavioral prompts are integrated into robo-advising and other financial technologies, platforms, and the people behind those platforms, must decide what factors they are optimizing — the investors’ benefits or the revenue and performance of the platform.

Gensler said at the time that finance platforms must comply with investor protections through specific duties — things like fiduciary duty, duty of care, duty of loyalty, best execution and best interest.