Republic Comments on SEC Rulemaking on Safeguarding Advisory Client Assets

Republic has submitted a comment letter to the Securities and Exchange Commission (SEC) regarding the proposed rulemaking on Safeguarding Advisory Client Assets.

Republic is one of the largest securities crowdfunding platforms in the US, providing access to capital via the full stack of private exemptions. It has also expanded into various alternative assets as well as pursuing an international expansion.

Comments are due on the proposed rule by May 8, 2023. The proposed amendments aim to:

  • Expand the current custody rule to protect a broader array of client assets and advisory activities to the rule’s protections;
  • Enhance the custodial protections that client assets receive under the rule;
  • Update related recordkeeping and reporting requirements for advisers.

A Fact Sheet on the proposal is available here.

The letter addressed to the SEC, signed by Maxwell Rich, Deputy General Counsel and Vice President of Regulatory Affairs for Republic, states:

“Republic Capital supports the spirit and intent of the Proposal, however, we believe that adoption, in its current form, could lead to many unforeseen and unintended externalities … For example, the Proposal, if adopted without changes, would impose significant implementation costs – costs which would ultimately be borne by investors.”

Republic is also concerned about the impact on digital assets, a sector of finance that remains opaque.

“Proposal does not sufficiently address how an adviser may maintain compliance while exploring or implementing novel uses for client assets. One such oversight relates to digital assets…”

While Republic agrees that safeguarding assets is of paramount importance, the implementation of the proposed rules will be “difficult, if not impossible for smaller advisors,” says the company. At the same time, portions of the proposal are deemed to be outside the Commission’s statutory authority as “it seeks to impose requirements directly on to parties to which the Commission may have no regulatory or supervisory claim.”

Republic worries about the development of custody providers for private securities as there are few players due to “high costs and low upside.”

“Republic Capital has searched for and is unaware of viable emerging market participants, especially with respect to private securities which take a digital form.”

Republic is not alone in its concern for the proposed rule changes. Mercatus, a free market think tank, holds similar concerns, bluntly stating the proposal should not be approved  as its “breadth and reach are unauthorized and excessive” and the “SEC does not have statutory authority for such an expansion.”

The current Commission has been criticized by some for its aggressive rulemaking approach, frequently pursuing overlapping issues that stretch industry participants’ ability to navigate the impact of all the proposed rules.

The letter submitted by Republic is available here.

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