Cryptocurrencies

SEC Solicits “Dialogue” with Public on Custody Rule Implications Raised by Crypto-Assets

March 28, 2019 | Parker MacIntyre

Recognizing the “swiftly developing” digital asset marketplace—a loosely defined sector encompassing cryptocurrencies, virtual coins or tokens (including Initial Coin Offerings or “ICOs”), and other blockchain-related financial assets—the SEC’s Division of Investment Management (the “Division”) has commenced an open-ended request for public comment on how such crypto-assets impact its decades-old Advisers Act Custody Rule (Advisers Act Rule 206(4)-2). The Division’s request for comment comes in the form of a March 12, 2019 letter to the Investment Adviser Association (“IAA”), a lobbying/trade group representing the investment advisory industry.

By way of background, the Custody Rule sets up a number of requirements for SEC-registered investment advisers that have “custody” of a client’s funds or securities. Custody is defined as “holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them.” Notably, custody includes, among other things, any arrangement under which the adviser is authorized to withdraw client funds or securities, as well as acting as general partner, or in a comparable control position, for an investment fund. The four primary obligations of an adviser having custody are that the adviser must: (i) maintain those funds or securities with a “qualified custodian;” (ii) notify the client in writing of the qualified custodian’s name, address, and the manner in which the funds or securities are maintained; (iii) have a “reasonable basis” for believing that the qualified custodian sends an account statement, at least quarterly, to each client, identifying the amount of funds/securities and setting forth all transactions in the account; and (iv) arrange for an independent public accountant to conduct an annual surprise examination in order to verify the safekeeping of the client’s funds and/or securities. The Custody Rule provides a number of exemptions to some of the above requirements; most notably, one that allows investment fund advisers to avoid the surprise exam requirement so long as audited financial statements are distributed within 120 days of the end of the fund’s fiscal year.

In an effort to “further inform our consideration of how characteristics of digital assets impact the application of the Custody Rule,” the Division’s request for comment seeks public comment on a wide array of trenchant queries, including the following:

Texas Prioritizes Regulation of Cryptocurrencies

May 9, 2018 | Elizabeth Dalziel

Over the last two months, the Texas State Securities Board (“Securities Board”) has published four emergency cease and desist orders alleging violations of the Texas Securities Act involving the offer and sale of cryptocurrencies. The fact that the Securities Board has issued four orders pertaining to cryptocurrencies shows that the Securities Board intends to make regulation of cryptocurrencies a priority. It is also expected that Texas could “take the lead” in regards to state regulation of cryptocurrencies. This follows last year’s announcement by the Securities and Exchange Commission that it intends to make the regulation of cryptocurrencies a priority this year in light of the fact that the cryptocurrency market has been growing over the years.

The Securities Board issued its first order involving cryptocurrencies on December 20, 2017 against a foreign firm called USI-Tech Limited. According to the order, USI-Tech Limited and its agents offered Texas investors investments “in a series of Bitcoin mining contracts.” The order alleged that these offers violated the Texas Securities Act because the investments, which were determined to be securities, were not registered in Texas. USI-Tech Limited’s agents also allegedly were not registered as Texas dealers or agents, and no applicable exceptions applied. The order also alleged that USI-Tech Limited and its agents made material misrepresentations and omissions concerning the offers. Continue reading ›

SEC to Host National Compliance Outreach Seminar in April

March 15, 2018 | Elizabeth Dalziel

On February 13, 2018, the Securities and Exchange Commission announced that it is accepting registrations for the National Compliance Outreach Seminar (“National Seminar”). The National Seminar, which is part of the SEC’s Compliance Outreach Program, is designed to help educate registered investment advisers’ chief compliance officers (“CCOs”), as well as their senior officers, about “various broad topics applicable to larger investment advisory firms and investment companies.” The National Seminar will take place on April 12, 2018 at the SEC’s headquarters in Washington, D.C., and it will last from 8:30 a.m. to 5:30 p.m. ET. While only 500 participants can attend in person, a live webcast will be provided via www.sec.gov.

This year the National Seminar will include six panel discussions between SEC personnel, CCOs, and various other industry representatives. SEC personnel who participate in the panels typically include officers from the Office of Compliance Inspections and Examinations, the Division of Investment Management, and the Division of Enforcement’s Asset Management Unit, as well as officers from other SEC divisions or offices. CCOs and other senior staff in private advisory firms typically participate in the panels as well. Each of these panels reflects areas of concern which the SEC likely intends to prioritize in 2018. Continue reading ›