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The SEC has launched a new initiative aimed at bringing clarity to the crypto sector.  SEC Acting Chairman Mark T. Uyeda announced the formation of a specialized Crypto Task Force dedicated to developing a comprehensive and clear regulatory framework for crypto assets. Commissioner Hester M. Peirce will lead the Crypto Task Force.

The Crypto Task Force seeks to provide clarity on the application of the federal securities laws to the crypto asset market and to recommend practical policy measures that aim to foster innovation and protect investors.

The scope of the Crypto Task Force’s focus will include assets colloquially referred to as digital assets, crypto assets, cryptocurrencies, digital coins and tokens, as well as protocols. The Crypto Task Force will help to draw clear regulatory lines, appropriately distinguish securities from non-securities, craft tailored disclosure frameworks, provide realistic paths to registration for both crypto assets and market intermediaries, ensure that investors have the information necessary to make investment decisions, and make sure that enforcement resources are deployed judiciously.

Commissioner Peirce recently outlined what the Crypto Task Force expects to accomplish:

• Security Status: The status of crypto assets under the securities laws is fundamental to resolving many other questions. The Task Force is working hard to examine different types of crypto assets.

• Scoping Out: The Task Force will work to help identify some areas that fall outside the Commission’s jurisdiction. As an initial step, the staff welcomes requests for no-action letters. No-action letters typically come in the form of a staff statement addressing specific circumstances spelled out in the letter under which the staff will not recommend enforcement action to the Commission. This statement is specific to the particular circumstances but gives the broader public a helpful window into the staff’s thinking.

• Coin and Token Offerings: The Task Force also is thinking about the possibility of recommending Commission action to provide temporary prospective and retroactive relief for coin or token offerings for which the issuing entity or some other entity willing to take responsibility provides certain specified information, keeps that information updated, and agrees not to contest the Commission’s jurisdiction in the event of a case alleging fraud in connection with the purchase and sale of the asset. These tokens would be deemed to be non-securities and thus there would be no uncertainty as to whether they would be able to trade freely on secondary markets not registered with the SEC as long as the information is kept up-to-date and accurate. This approach would bridge the gap until a more permanent rule or legislation could be finalized. It would provide a pathway for existing tokens to find their way out of the fog of uncertainty that obscures a feasible path forward and would encourage the provision of greater disclosure.

• Registered Offerings: The Task Force will consider working with staff to recommend that the Commission modify existing paths to registration, including Regulation A and crowdfunding, so that people interested in registering token offerings will have a viable path for doing so.

• Special Purpose Broker Dealer: The Task Force will explore possible updates to the special-purpose broker dealer no-action statement, which in its current form has not been a success. An initial change we may suggest is that the statement be expanded to cover broker-dealers that custody crypto asset securities alongside crypto assets that are not securities. We will work with the public to identify other obstacles to registration.

• Custody Solutions for Investment Advisers: We will work with investment advisers to provide an appropriate regulatory framework within which advisers can safely, legally, and practically custody client assets themselves or with a third-party.

• Crypto-Lending and Staking: We need to provide clarity about whether crypto-lending and staking programs are covered by the securities laws and, if so, how. We plan to work to help address how such programs can be structured consistent with the law.

• Crypto Exchange-Traded Products: The Commission already is receiving SRO proposed rule changes to list new types of crypto exchange-traded products. The Task Force will work with the staff to provide clear statements about the approach used when approving or disapproving these applications. The Task Force will also assist the staff and the Commission in considering requests to modify certain features of existing exchange-traded products, including to allow for staking and in-kind creations and redemptions. Before these changes can be operationalized, however, the Commission may have to make progress on custody and other issues.

• Clearing Agencies and Transfer Agents: The Task Force also plans to work on the intersection of crypto and clearing agency and transfer agent rules. We will continue to work with market participants interested in tokenizing securities or otherwise using blockchain technology to modernize traditional financial markets.

• Cross-Border Sandbox: Many crypto projects are international in scope. The Task Force is considering ways to facilitate cross-border experimentation on a limited scale and temporary timeframe, with the possibility of more permanent, long-term approaches.

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On October 21, 2024, the Securities and Exchange Commission (SEC) Division of Examinations announced its Examination Priorities. The exam priorities focus on six different types of market participants subject to SEC regulation or oversight, as well as four risk areas impacting many market participants.

Market Participants:

1. Investment Advisers
2. Investment Companies
3. Broker-Dealers
4. Self-regulatory organizations (SROs)
5. Clearing Agencies
6. Other market participants include municipal advisors, security-based swap dealers, transfer agents, security-based swap execution facilities, and funding portals.

Risk Areas:

1. Information security and operational resiliency
2. Crypto assets and emerging financial technology
3. Regulation systems compliance and integrity (SCI)
4. Anti-money laundering (AML)

Market Participants:

1. Investment Advisers

SEC will continue to prioritize advisers’ adherence to their duty of care and duty of loyalty obligations to clients. The focus will be on:

• Investment advice provided to clients about products, investment strategies, and account types and whether that advice satisfies the fiduciary obligations owed to clients.
• Dual registrants and advisers with affiliated broker-dealers. Among other areas, the SEC will review the appropriateness of account selection practices, disclosures to clients regarding the capacity in which recommendations are made, and whether and how advisers adequately mitigate and fairly disclose conflicts of interest and
• The impact of conflicts of interest on providing impartial advice and best execution, with consideration given for non-standard fee arrangements.

SEC will continue evaluating the effectiveness of advisers’ compliance programs pursuant to Rule 206(4)-7 under the Investment Advisers Act of 1940. As well as focus on investment advisers to private funds. Key areas of focus include but are not limited to:

• Fiduciary obligations of advisers that outsource investment selection and management.

• Disclosures and fiduciary duty considerations for strategies that may be sensitive to market volatility and/or interest rate changes (e.g., commercial real estate, illiquid assets, and private credit), with particular focus on advisers to private funds that are experiencing poor performance and/or hold more leverage or difficult-to-value assets.
• Accuracy of calculations and allocations of private fund fees and expenses.
• Conflicts, controls, and disclosures regarding the use of debt, fund-level lines of credit, investment allocations, adviser-led secondary transactions, investments held by multiple funds, and use of affiliated service providers.
• Compliance with recently adopted SEC rules, including amendments to Form PF and the updated rules that govern investment adviser marketing.

2. Investment Companies

SEC will focus on the evaluation of registered investment company compliance programs, fund governance practices, disclosures to investors, and accuracy of reporting to the SEC. Specific examination focus areas may include:

• Assessment of fees and expenses, and any associated waivers and reimbursements.
• Oversight of affiliated and third-party service providers.
• Portfolio management practices and disclosures for consistency with claims about investment strategies, fund filings, and marketing materials.
• Issues associated with market volatility.

3. Broker-Dealers

SEC will evaluate whether broker-dealers have established, maintained, and enforced written policies and procedures reasonably designed to achieve compliance with Regulation Best Interest (BI), Form CRS, financial responsibility rules, and trading practices. Focus areas will include but not be limited to:

• Recommendations to retail customers and compliance with Regulation BI.
• Recommendations regarding products, investment strategies, and account types and whether the broker has a reasonable basis to believe the recommendation is in the best interest of the customer and does not place the broker’s interests ahead of the customer’s interests.
• Conflicts of interest disclosures and conflict identification, mitigation, and elimination practices.
• Processes for reviewing reasonably available alternatives.
• Factors relating to clients’ investment profiles (e.g., investment goals and account characteristics).

 

4. Self-Regulatory Organizations (SROs)

SEC will scrutinize SRO compliance with rules governing operations, enforcement activities, and fulfillment of regulatory duties.

5. Clearing Agencies

SEC will examine, at least once annually, each clearing agency designated as systemically important.

6. Other Market Participants

SEC focus areas for other market participants include but are not limited to:

• Compliance with fiduciary duty obligations, recordkeeping, and registration requirements.
• Security-based swap dealers’ compliance with obligations under Regulation SBSR, capital, margin, and segregation requirements.
• Transfer agent processing, safeguarding of funds and securities, and regulatory filings.
• Funding portals’ compliance with recordkeeping requirements and written policies and procedures that are reasonably designed to achieve compliance with federal securities laws.

Risk Areas

1. Information Security and Operational Resiliency

SEC will continue its focus on registrants’ information security practices and their operational resiliency, including data loss prevention, access controls, account management, responses to cyber-related incidents, and alternative trading systems’ safeguards to protect confidential trading information.

SEC will also assess cybersecurity risks and resiliency goals associated with the use of third-party services, particularly where such services are used without the IT department’s approval, knowledge, or oversight.

For broker-dealers and investment advisers, the SEC will assess firms’ practices to prevent account intrusions and safeguard customer records and information.

2. Emerging Financial Technologies

SEC will focus on companies’ use of emerging technologies and alternative sources of data (e.g., automated investment tools, artificial intelligence, and trading platforms) and examine firms that use digital investment advisory services and related methods.

3. Crypto Assets

SEC will focus on the offer, sale, recommendation, advice, trading, and other activities involving crypto assets that are offered and sold as securities (e.g., spot bitcoin or ether exchange-traded products). Among other measures, exams will review whether registrants:

• Adhere to applicable standards of conduct when advising clients regarding crypto assets.
• Have sufficient initial and ongoing understanding of these products, particularly where investors are retail-based and investments involving retirement assets.
• Routinely review, update, and enhance their compliance practices with respect to crypto asset wallet reviews, custody practices, Bank Secrecy Act compliance, valuation procedures, risk disclosures, and operational resiliency.

4. Regulation SCI

SEC will evaluate whether SCI entities (e.g., exchanges and clearinghouses) have implemented policies and procedures to ensure the security and resiliency of their systems and meet Regulation SCI requirements. Exams will evaluate SCI entities’ operational risk management, business continuity planning, and incident response capabilities to uphold market stability.

5. Anti-Money Laundering (AML)

SEC will examine whether broker-dealers and certain registered investment companies:

• Have AML programs tailored to address the risks associated with the firm’s location, size, and activities.
• Conduct independent testing.
• Establish adequate customer identification programs.
• Meet suspicious activity report filing obligations.
• Monitor Office of Foreign Assets Control sanctions.

Registered entities should take note of these priorities when assessing their compliance programs to ensure such programs address the SEC focus. If you have any questions on these priorities or your compliance framework contact info@cadienmayersconsulting.com.

#SEC #EXAMPRIORITIES #2025EXAM #InvestmentAdviser #IA #BrokerDealer #BD #AML #crypto #risk

The Financial Crimes Enforcement Network (FinCEN) issued a final rule in September 2024 that strengthens anti-money laundering (AML) and countering the financing of terrorism (CFT) requirements for certain investment advisers. The rule applies to registered investment advisers (RIAs) and exempt reporting advisers (ERAs) that are registered with the U.S. Securities and Exchange Commission (SEC). The rule takes effect on January 1, 2026.

The rule’s requirements include:

• AML/CFT program

RIAs and ERAs must establish and implement a written AML/CFT program. The program must include internal policies, procedures, and controls to prevent money laundering and terrorist financing. The program must also include designating AML compliance officers, providing training, and independent testing the program’s effectiveness.

• Reporting

RIAs and ERAs must file suspicious activity reports (SARs) and other reports with FinCEN.

• Recordkeeping

RIAs and ERAs must comply with recordkeeping requirements.

• Information sharing

RIAs must share information with FinCEN, law enforcement, and certain financial institutions.

• Special measures

RIAs are subject to special measures imposed by FinCEN under the USA Patriot Act.

 

For many RIAs and ERAs, including those with existing AML programs, implementation of the final rule’s requirements will require significant attention and planning.  It will not be feasible to implement these requirements through adoption of a template policy.  Investment Advisers are strongly recommended to begin their implementation efforts early.

Compliance with the final rule will be complex and require individual consideration. If you have any questions, please consult info@cadienmayersconsulting.com

#InvestmentAdviser #IA #FinCEN #AML #newrule #newamlrule #IAAMLRule