Congressmen Michael Flood and Ritchie Torres wrote to SEC Chair Gary Gensler, urging him to keep custody rules unchanged.

In February, the U.S. Securities and Exchange Commission (SEC) proposed specific changes to the Investment Advisors Act 1940. Currently, the definition of “qualified custodians” includes state-chartered banks, state-regulated trust companies, and Federally regulated banks and savings associations.

Under the proposed changes, the SEC wants to limit the definition to include only banks and savings associations under Federal regulation.

Congressmen Flood and Torres wrote to Chair Gensler on May 18, urging him to keep the current definition unchanged.

They argued that custody of assets for a Registered Investment Advisor (RIA) is a “core banking activity.” Therefore, such activity should be subject to the banking rules and regulations under the existing dual-banking system in the U.S. – with state and national banks operating equivalently.

The Congressmen also pointed out that state regulators already have rules in place to protect consumers. Uninsured state trust companies remain subject to comprehensive customer protection rules, like capital and liquidity standards, and have “prudently offered custody services for centuries.”

Therefore, narrowing the definition of qualified custodians “will do the opposite” of providing more security for investors, the Congressmen wrote. They added that given the small number of digital asset custodians, limiting the definition will likely cause market concentration and adversely impact competition.

Finally, it was pointed out that the SEC’s own draft noted that a narrowing of the definition might cause investors to remove assets from an innovative and safe custodian – potentially resulting in assets placed at a “greater risk of loss.”

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