On October 16, 2023, the SEC’s Division of Examinations released a reporting detailing its 2024 examination priorities. The document lays out the key risks, topics and priorities that the Division plans to focus on during its upcoming cycle of inspections and examinations of broker-dealers, investment advisers and other regulated securities intermediaries. Among the various areas of focus, once again risks related to crypto assets and blockchain will be an examination priority.
According to the report, the Division will focus on broker-dealers and investment advisers that offer new products and services or are employing new practices, particularly technological and online solutions that service online accounts. The Division remains focused on certain services, including automated investment tools, artificial intelligence and trading algorithms or platforms, and the risks associated with the use of emerging technologies and alternative sources of data. The report notes that the Division continues to observe the proliferation of certain types of investments, including crypto assets and their associated products and services, and emerging financial technology, such as broker-dealer mobile applications and investment advisers choosing to provide automated investment advice to their clients.
The report projects that examinations of registrants will focus on the offer, sale, recommendation of, advice regarding, trading in and other activities in crypto assets or related products. In particular, the Division indicated it will review whether registrants involved with crypto assets meet and follow their respective standards of conduct when recommending or advising customers and clients regarding crypto assets, particularly when the investors are retail-based (including older investors) and investments involve retirement assets.
The Division also announced that, for registrants transacting in crypto assets, it will test whether the registrants regularly review, update and enhance their compliance practices (including crypto asset wallet reviews, custody practices, Bank Secrecy Act (BSA) compliance reviews and valuation procedures), risk disclosures and operational resiliency practices (such as data integrity and business continuity plans), if required. With respect to crypto assets that are funds or securities, the Division will also consider whether investment advisers are complying with the custody requirements under the Investment Advisers Act (including Rule 206(4)-2). Moreover, the report makes clear that the Division will assess whether any technological risks associated with the use of blockchain and distributed ledger technology have been addressed, including whether compliance policies and procedures are reasonably designed, accurate disclosures are made and the risks pertaining to the security of crypto asset securities are addressed.