SEC Announces 2022 Examination Priorities

On March 30, 2022, the Securities and Exchange Commission’s Division of Examinations (the “Division”) announced its 2022 Examination Priorities (the “Priorities”), including several significant areas of focus and many perennial risk areas. Under the Priorities, the Division will focus on the following topics and issues: private funds, environmental, social and governance (ESG) investing, retail investor protections, information security and operational resiliency, emerging technologies, and crypto-assets. 

In announcing the Priorities, the Division’s Acting Director, Richard Best, stated “[i]n this time of heightened market volatility, the Division’s priorities are tailored to focus on emerging issues, such as crypto-assets and expanding information security threats, as well as core issues that have been part of the SEC’s mission for decades – such as protecting retail investors. . . . Our priorities cover a broad landscape of potential risks to investors that firms should consider as they review and strengthen their compliance programs."

As it relates to crypto, digital assets, and emerging financial technologies (“FinTech”) the Division indicated it will focus on a number of issues in these areas. The Division said it observed a number of registered investment advisers (“RIAs”) choosing to provide automated digital investment advice to their clients (so called, “robo-advisers” or “robo-advising”), and growth in mobile apps by broker-dealers, and the dynamic growth in the offer, sale, and trading of crypto-assets. See Priorities at 16.

As a result, the Division will conduct examinations of broker-dealers and RIAs who are developing FinTech products to assess whether the risks unique to these activities were considered by these regulated entities when designing their compliance programs. Id.

With respect to crypto-assets, the Division indicated that “examinations of market participants engaged with crypto-assets will continue to review the custody arrangements for such assets and will assess the offer, sale, recommendation, advice, and trading of crypto-assets.” Id. The Division will review whether market participants dealing with crypto assets: 

“(1) have met their respective standards of conduct when recommending to or advising investors with a focus on duty of care and the initial and ongoing understanding of the products (e.g., blockchain and crypto-asset feature analysis); and

(2) routinely review, update, and enhance their compliance practices (e.g., crypto-asset wallet reviews, custody practices, anti-money laundering reviews, and valuation procedures), risk disclosures, and operational resiliency practices (i.e., data integrity and business continuity plans).” Id.

The Division will also conduct examinations on mutual funds and ETFs that offer exposure to crypto-assets to assess, among other things, compliance, liquidity, and operational controls around portfolio management and market risk. Id.

To round out the SEC’s focus on FinTech, the Division will also examine broker-dealers and RIAs that offer, or claim to offer, new products and services, such as fractional shares and certain digital marketing markets – specifically, the use of “Finfluencers” – to determine whether “(1) operations and controls in place are consistent with disclosures made and the standard of conduct owed to investors and other regulatory obligations; (2) advice and recommendations, including by algorithms, are consistent with investors’ investment strategies and the standard of conduct owed to such investors; and (3) controls take into account the unique risks associated with such practices.” Id.

Takeaways

The Division’s inclusion of FinTech and digital assets in its 2022 Priorities continues its focus on issues identified in the Division’s 2021 Examination Priorities (the “2021 Priorities”). Indeed, the topics of robo-advisers, fractional shares, and mobile applications appeared in the Division’s 2021 Priorities. However, the 2022 Priorities represent a heightened focus by the SEC on compliance associated with digital assets and associated marketing practices. Market participants should consider how their crypto, FinTech, and marketing practices relate to the Priorities and consider whether their compliance programs sufficiently address the risks associated with these activities, particularly as it relates to duties of care with respect to recommending crypto as investments, crypto-assets custody, and anti-money laundering.

It remains to be seen whether the Division’s 2022 Priorities will lead to any changes or review to the Division’s February 2021 Risk Alert, The Division of Examinations’ Continued Focus on Digital Asset Securities, which highlights risks observed by the Division during examinations of investment advisers, broker-dealers, and transfer agents regarding digital assets that are securities. Further, as Congress considers the regulatory environment in the U.S. regarding stablecoins, cryptocurrencies, and digital assets, certain members of the Congressional Blockchain Caucus are questioning the SEC’s approach for collecting information from cryptocurrency and blockchain firms via the Division and the SEC’s Division of Enforcement. Those questions, which seek to understand how the SEC’s activities comport with the Paperwork Reduction Act, potentially serve as a statutory check on the SEC’s substantial examination and enforcement requests to digital asset market participants.

The regulatory scrutiny on marketing for crypto and digital assets is not unique to the United States. On January 17, 2022, the Monetary Authority of Singapore issued guidelines that discourage cryptocurrency trading service providers from promoting their services to the general public, such as through traditional media advertising, social media, and the use of Finfluencers. Those operating in the crypto sector have viewed MAS’ guidelines as a setback as Singapore has long been regarded as an innovation- and crypto-friendly jurisdiction.