On January 7, 2019, the Securities and Exchange Commission (“SEC”)’s Office of Compliance Inspections and Examinations (OCIE) released its 2020 examination priorities. The majority of OCIE’s priorities for the coming year involved financial regulatory issues that do not directly involve cryptocurrency – for a more detailed review of those priorities, please see the Client Alert posted on our firm’s website.
Tucked away in the SEC’s 22-page document, OCIE identified two examination priorities concerning virtual currencies and digital assets:
- First, OCIE advised that it will continue to “examine SEC-registered market participants” engaged in cryptocurrency activities, specifically for: (1) investment suitability, (2) portfolio management and trading practices, (3) safety of client funds and assets, (4) pricing and valuation, (5) effectiveness of compliance programs and controls, and (6) supervision of employee outside business activities. OCIE stated that the rapid growth of digital assets presents various risks, including “for retail investors who may not adequately understand the differences between these assets and more traditional products.”
- Second, OCIE will continue to examine the core functions of transfer agents involved in the settlement of securities transactions and their role in maintaining proper records and safeguarding funds and securities. Specifically, OCIE noted: “Examination candidates will include transfer agents that serve as paying agents for issuers, transfer agents developing blockchain technology, and transfer agents that provide services to issuers of microcap securities, private offerings, crowdfunded securities, or digital assets.”
OCIE’s sustained interest in the risks associated with cryptocurrency is certainly not surprising, as evidenced by the SEC enforcement activity in the latter half of 2019 (which included, among other things, attempts to halt what it deemed non-compliant token distributions). Indeed, looking ahead, other regulators such as the IRS, FinCEN and CFTC are also watching the cryptocurrency space closely. Thus, regulated entities engaged with blockchain and digital currency should understand the OCIE’s 2020 examination priorities in maintaining policies addressing regulatory compliance concerns.