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The U.S. Securities and Exchange Commission Reveals its Exam...
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The U.S. Securities and Exchange Commission Reveals its Examination Priorities for the New Year

The SEC has just unveiled new examination priorities for 2020. In the list below, we show what they’ve outlined for cryptocurrencies in 2020.

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It’s another year of cryptocurrency-related drama at the SEC. The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) has just announced its 2020 examination priorities. A focus on ‘digital assets’ is listed as a priority for the SEC.

The criteria for regulatory examination on cryptocurrencies comes down to a few key areas. Although the language is hard to understand for those not in-the-know, six key areas were outlined:

OCIE’s 2020 examination priorities are:

  • Retail Investors, Including Seniors and Those Saving for Retirement – OCIE will continue its focus on the protection of retail investors, including the various intermediaries that serve and interact with retail investors and the investments marketed to, or designed for, retail investors. Examinations in these areas will include reviews of disclosures relating to fees, expenses, and conflicts of interest.
  • Market Infrastructure – OCIE will continue its focus on entities that provide services critical to the functioning of our capital markets, including clearing agencies, national securities exchanges, alternative trading systems, and transfer agents. Particular attention will be focused on the security and resiliency of entities’ systems.
  • Information Security – OCIE will continue to prioritize cyber and other information security risks across the entire examination program.
  • Focus Areas Relating to Investment Advisers, Investment Companies, Broker-Dealers, and Municipal Advisors – OCIE will continue its risk-based examinations for each type of these registered entities. In particular, examinations of registered investment advisers (RIAs) will focus on RIAs that have never been examined, including new RIAs and RIAs registered for several years that have yet to be examined. These examinations will include RIAs advising retail investors as well as private funds.  Investment company examinations will focus on mutual funds and exchange-traded funds, the activities of their RIAs, and the oversight practices of their boards of directors. Broker-dealer examinations will focus on issues relating to the preparation for and implementation of recent rulemaking, along with trading practices. Municipal advisor examinations will include review of registration and continuing education requirements and municipal advisor fiduciary duty obligations to municipal entity clients.
  • Anti-Money Laundering Programs – OCIE will continue to review for compliance with applicable anti-money laundering (AML) requirements, including whether entities are appropriately adapting their AML programs to address their regulatory obligations.
  • Financial Technology (Fintech) and Innovation, Including Digital Assets and Electronic Investment Advice – OCIE recognizes that advancements in financial technologies, methods of capital formation and market structures, as well as registered firms’ use of new sources of data (often referred to as “alternative data”), warrant ongoing attention and review. OCIE also will continue to identify and examine SEC-registered firms engaged in the digital asset space, as well as RIAs that provide services to clients through automated investment tools and platforms, often referred to as “robo-advisers.”
  • FINRA and MSRB – OCIE will continue its oversight of the Financial Industry Regulatory Authority (FINRA) by focusing examinations on FINRA’s operations, regulatory programs, and the quality of FINRA’s examinations of broker-dealers and municipal advisors. OCIE will also continue to examine the Municipal Securities Rulemaking Board (MSRB) to evaluate the effectiveness of its operations and internal policies, procedures, and controls.
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Let’s break them down:

  1. Investment suitability: The SEC will assess risk and whether there is an overly high probability of losses that would unfairly hurt investors. This will work to further kick out scams from the industry.
  2. Portfolio management and trading practices: Sources of data will be vetted to ensure that cryptocurrency portfolio management is in line with other market sectors.
  3. Safety of funds: Given that custodial services and exchanges are increasingly holding cryptocurrency funds, the SEC is taking a focus on ensuring these funds are safe and insured.
  4. Pricing and valuation: Insider trading, pump-and-dump schemes, and assessing market risk all remain high on the agenda for the SEC. This is part of the reason why a Bitcoin ETF has been delayed thus far: the market still has to meet these standards.
  5. Compliance programs and controls: As expected, compliance programs will take precedence this year as the SEC is expected to green-light more blockchain projects.
  6. Supervision of employees outside business activities: All employees of broker-dealers will legally need to report outside business activities. This will expectedly be applied to the cryptocurrency industry as well.

Although the 2020 examination priorities did not put forward many regulatory specifics, it seems clear that digital assets will continue to be a hot topic for the SEC this year. Hopefully, there will be some clarification on the endless ‘securities or utility tokens’ question, which has been plaguing most cryptocurrency projects for some time now.

 

Legal clarity is ultimately the necessary step needed before the blockchain space can mature and be accepted in the economy at large. 2020 is looking like it’ll bring the industry closer to this goal.

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