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SEC Issues Alert Over Digital Securities Sales

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What You Need to Know

  • Its Division of Examinations issued an alert for investment advisors, BDs, exchanges and transfer agents.
  • The alert focuses on compliance with regulations related to the offer, sale and trading of digital securities to investors.
  • The division reports that some activities related to those pursuits

The SEC’s Division of Examinations has alerted investment advisors, broker-dealers, national securities exchanges and transfer agents that it will be focusing on their compliance with regulations related to the offer, sale and trading of digital securities to investors. 

Such offerings and transactions are growing in popularity along with the use of cryptocurrencies, but questions remain about what constitutes a digital security.

Former SEC Chairman Jay Clayton had said that Bitcoin was not a digital security but a payment mechanism and store of value while initial coin offerings (ICOs) could be securities but would have to be registered with the SEC before they were sold.

The SEC risk alert acknowledges that “as financial innovation continues, market participants may have questions as to their regulatory obligation,” and should contact agency staff through the SEC’s Innovation Technology hub (FinHub) with their questions.

The alert notes, “It is the Division’s experience that a number of activities related to the offer, sale and trading of digital assets that are securities present unique risks to investors.” 

The examinations division encourages market participants to consider their own practices, policies and procedures that apply to digital assets, and improve supervisory, oversight and compliance programs.

Its risk alert lists in some detail which types of activity and policies it will be watching for each group of market participants — investment advisors, BDs, national securities exchanges and transfer agents. 

SEC’s Oversight Details

For investment advisors, for example, the focus will be on portfolio management, including their classification of digital assets (as securities or not) and fulfillment of their fiduciary duty; books and records; custody; disclosures of specific risks; valuation of client portfolios; and registration issues.

Many of these categories also include lists of multiple, specific items that the division will be scrutinizing.

For broker-dealers, the Division of Examination will focus on the safekeeping of funds and operations, registration requirements and anti-money-laundering. 

Exchanges that allow electronic trading in digital assets must register as a national securities and be in compliance with regulation ATS, alternative trading systems.

Transfer agents must comply with rules intended to facilitate prompt and accurate clearance of and settlement of transactions.

 

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