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(Kitco News) -
The Securities and Exchange Commission (SEC) announced their Division of Examinations’ 2023 priorities on Feb. 7, outlining “the areas it believes present potential risks to investors and the integrity of the U.S. capital markets.”
Not surprisingly, digital assets and cryptocurrencies are among their most pressing concerns.
“Our priorities reflect the changing landscape and associated risks in the securities market and are the product of a risk-based approach to examination selection that balances our resources across a diverse registrant base,” said Richard R. Best, Director of the Division of Examinations.
The Division said it will prioritize “examinations of broker-dealers and RIAs” – Registered investment advisors – “that are using emerging financial technologies or employing new practices, including technological and on-line solutions” to ensure they meet compliance and marketing requirements.
“Examinations of registrants will focus on the offer, sale, recommendation of, or advice regarding trading in crypto or crypto-related assets and include whether the firm (1) met and followed their respective standards of care when making recommendations, referrals, or providing investment advice; and (2) routinely reviewed, updated, and enhanced their compliance, disclosure, and risk management practices,” they wrote.
The new Marketing Rule (Advisers Act Rule 206(4)-1) will figure prominently in the SEC’s crypto oversight, as the misleading marketing claims of several crypto firms that ultimately lost customer assets have become focal points for the regulators’ ongoing investigations.
The Division will be looking to verify whether RIAs “have adopted and implemented written policies and procedures that are reasonably designed to prevent violations […] of the new rule, and whether RIAs have complied with the substantive requirements.”
Other key SEC priorities for 2023 include enforcing the new Derivatives Rule and Fair Valuation Rule for investment companies and RIAs, looking at whether RIAs are managing conflicts of interest and acting in the best interest of working families and retail investors, ensuring ESG-related advisory services and fund offerings are operating according to their disclosures, and reviewing the information security and operational resiliency capacities of broker-dealers and RIAs.
“In a time of growing markets, evolving technologies, and new forms of risk, our Division of Examinations continues to protect investors,” said SEC Chair Gary Gensler. “In executing against the 2023 priorities, the Division will help ensure compliance with the federal securities laws and rules.”
Recent moves by the SEC show that the regulator has extended its scrutiny of crypto deeper into the traditional financial sector. On Jan. 26, reports emerged of ongoing investigations into RIAs to determine whether they are violating rules governing custody of customers’ crypto assets.
Investment advisers cannot legally maintain custody of client funds or securities if they do not meet specific requirements, including that advisers hold assets with a firm deemed to be a ‘qualified custodian.’
On Dec. 8, the SEC issued a guidance to all publicly-traded companies in the United States, warning them that they must review their disclosure obligations as they relate to crypto.
“Recent bankruptcies and financial distress among crypto asset market participants have caused widespread disruption in those markets,” they wrote. “Companies may have disclosure obligations under the federal securities laws related to the direct or indirect impact that these events and collateral events have had or may have on their business.”
The SEC’s Division of Corporation Finance (DCF) wants companies to evaluate their disclosures to give investors “specific, tailored disclosure about market events and conditions, the company’s situation in relation to [them], and the potential impact on investors.” The DCF added that companies with ongoing reporting obligations should verify whether their existing disclosures need to be updated.
The DCF also shared a sample letter containing 16 areas of questioning they would put to firms about their exposure to crypto markets, including “a company’s exposure to counterparties and other market participants; risks related to a company’s liquidity and ability to obtain financing; and risks related to legal proceedings, investigations, or regulatory impacts in the crypto asset markets.”
The SEC has recently been on the receiving end of scathing criticism from lawmakers and market participants for their apparent failure to protect investors from the collapse of FTX and Alameda Research, despite SEC Chair Gary Gensler’s well-publicized meetings with former FTX CEO Sam Bankman-Fried.
On Dec. 6, New York Congressman Ritchie Torres wrote a letter to Gene Dodaro, Comptroller General of the U.S. Government Accountability Office (GAO), in which he called for Dodaro to “conduct an independent review of the SEC's failure to protect the investing public from the egregious mismanagement and malfeasance of FTX.”
Torres wrote that Gensler is “singularly responsible for the regulatory failures surrounding the collapse of FTX,” which caused billions in losses to both creditors and customers.
After the collapse of FTX, the SEC announced that they were in fact in the midst of investigating the exchange for possible violations of money-laundering laws.
