Division of Examinations’ continued focus on digital asset securities

Mar 17, 2021
Digital assets Capital markets
Financial reporting SEC matters Audit Asset management

The SEC Division of Examinations recently issued a Risk Alert to provide observations made by Division staff during examinations that may assist investment advisers, broker-dealers, national securities exchanges and transfer agents in enhancing their compliance practices regarding digital asset securities. In addition, the Risk Alert provides transparency about areas of focus for the Division’s future examinations.

Future examinations of investment advisers managing digital asset securities will focus on regulatory compliance associated with the following, among other matters:

  • Portfolio management policies, procedures and practices regarding:
    • Classification of digital assets managed on behalf of clients
    • Due diligence on digital assets
    • Evaluation and mitigation of risks related to trading venues and trade execution or settlement facilities
    • Management of risks and complexities associated with “forked” and “airdropped” digital assets
    • Fulfillment of their fiduciary duty with respect to investment advice
  • Making and keeping accurate books and records, given that digital asset trading platforms vary in reliability and consistency with regard to order execution, settlement methods and post-trade recordation and notification
  • Practices related to the custody of digital assets
  • Disclosures to investors regarding the unique risks associated with digital assets
  • Valuation methodologies for pricing client portfolios, and related disclosures
  • How the investment adviser calculates its regulatory assets under management and characterizes the digital assets in the pooled vehicles it manages

Future examinations of broker-dealers will focus on regulatory compliance associated with the following, among other matters:

  • Safekeeping of funds and operations, including operations that are unique to the safety and custody of digital assets securities
  • Anti-money laundering procedures, controls and documentation regarding digital asset securities
  • Due diligence performed, and disclosures made, by broker-dealers related to the offering of digital asset securities
  • Existence and disclosures of conflicts of interest and the compliance policies and procedures to address them
  • The evaluation of activities of FINRA-member broker-dealer registered persons to determine whether such activity should be subjected to the approval, supervision and recordation of the broker-dealer