SEC Exams To Focus On ICOs And Cryptocurrency

On February 7, 2018, the SEC’s Office of Compliance Inspections and Examinations (OCIE) announced its 2018 Examination Priorities.  In what comes as no surprise, the exam priorities include initial coin offerings (ICOs) and cryptocurrency, stating the following:

“The cryptocurrency and ICO markets have grown rapidly and present a number of risks for retail investors. Along with the growth of these products and markets, the number of broker-dealers and investment advisers engaged in this space continues to grow as well. We will continue to monitor the sale of these products, and where the products are securities, examine for regulatory compliance. Areas of focus will include, among other things, whether financial professionals maintain adequate controls and safeguards to protect these assets from theft or misappropriation, and whether financial professionals are providing investors with disclosure about the risks associated with these investments, including the risk of investment losses, liquidity risks, price volatility, and potential fraud.”

Here are a few key takeaways:

  1. OCIE’s focus on ICOs and cryptocurrency inherently heightens the stakes with respect to broker-dealers’ and investment advisers’ cyber programs and their ability to prevent theft or misappropriation of digital assets.
  2. With the enthusiasm and momentum surrounding ICOs and cryptocurrency, OCIE will be checking to see if broker-dealers and investment advisers are adequately disclosing the risks of purchasing these assets, especially for “Main Street” investors.
  3. This is the first time OCIE has included ICOs and cryptocurrency-related matters in its list of exam priorities. This is significant because it marks the beginning of a new normal, with the SEC allocating significant resources to this space.  This highlights that an increasing number of broker-dealers and investment advisers are engaging (or considering engaging) in activity involving ICOs or cryptocurrency.  FINRA also recently highlighted ICOs and cryptocurrency for the first time in its annual broker exam priorities letter.

2018 has already seen an abundance of regulatory warnings and scrutiny directed at ICOs and cryptocurrency.  The SEC has left no doubt that it will examine business, compliance and supervisory practices in this space and will take swift measures to prevent fraud and manipulation, especially when retail investors are at risk.

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