The US Securities and Exchange Commission’s Division of Examinations has issued a ‘risk alert’ highlighting compliance considerations and requirements for firms dealing digital assets.
The risk alert was released by the SEC on February 26, with the exam division outlining what the regulator looks for in terms of compliance from brokers and firms offering digital assets. The observations were drawn from previous dealings with investment advisers, broker-dealers, and transfer agents that are working with cryptocurrencies.
The report breaks down future considerations for dealing with investment advisers, broker-dealers, national securities exchanges and transfer agents from the observations already garnered and the document is intended as a guide for these different participants to navigate potential regulatory infringements.
The Division of Examinations noted that it would focus on regulatory compliance of investment advisors in regards to their portfolio management, the accuracy of their books and records, the methods used for cryptocurrency custody, the disclosure of risks to clients around cryptocurrency investment, how the advisors value client portfolios and how they register different investment assets and customers.
Future examinations of broker-dealers will focus on regulatory compliance associated with safekeeping of funds, registration requirements, anti-money laundering requirements, the offerings of the broker, disclosures of any conflicts of interest as well as outside business activities of its representatives.
The risk alert also indicates that cryptocurrency exchanges, whether centralized or decentralized, need to be aware of the requirements for operating electronic trading platforms:
“A platform that operates as an “exchange” as defined under Section 3(a)(1) of the Exchange Act and Rule 3b-16(a) thereunder must register as a national securities exchange or operate pursuant to an exemption.20 The staff will examine platforms that facilitate trading in Digital Asset Securities and review whether they meet the definition of an exchange,” an excerpt from the announcement read.
Anti-money laundering shortcomings a highlight
The Division of Examinations notes that the characteristics of blockchain technology have presented ‘unique challenges’ to the proper implementation of AML procedures. As a result the division’s team has seen instances where firms are not meeting AML requirements.
“The staff has observed broker-dealer AML programs that have not consistently addressed or implemented routine searches or, to the extent they implemented routine searches, have not updated those searches to check against the Specially Designated Nationals list maintained by the Office of Foreign Assets Control (“OFAC”) at the U.S. Department of the Treasury.”
The report also stated that staff had also observed inadequate AML procedures, controls, and documentation when dealing with cryptocurrencies.