The auditing department of the Security and Exchange Commission published a draft for investment managers and institutions on Friday, how the department will review the handling of crypto assets or “digital asset securities” in the future.
The department (formerly the Office of Compliance Inspections and Examinations) is the second largest wing of the SEC and has the task of overseeing the actors in the securities industry to ensure compliance with legal requirements.
This risk warning is aimed at investment advisors, broker-dealers, exchanges and transfer agents and contains a broad list of specific procedural, accounting and advisory steps that the division will expect in future investment firm reviews.
“As more securities industry participants seek exposure to digital asset-related activities, this risk alert provides visibility into the focus areas for the division’s future audits,” the office wrote.
Investment advisers should be aware of the risks associated with forks and airdrops, and the department will review “Advisers’ Compliance with Their Fiduciary Duty to Provide Investment Advice,” a comment believed to be related to disclosing the risks associated with crypto.
Investment custodians, meanwhile, should have “continuity plans” in situations where key executives have access to private keys, and the department will look into private key management going forward.
The most thorough sections include guidelines on anti-money laundering considerations for broker-dealers, which the division believes has been a point of failure for some institutions.
“Certain pseudonymous aspects of distributed ledger technology present unique challenges to the robust implementation of an AML program,” the department wrote.
“Employees have observed broker-dealer AML programs that have not consistently handled or implemented routine searches or, to the extent that they have performed routine searches, they have not updated those searches to match the list of specially designated nationals maintained by the Bureau of Foreign Property Control compare (“OFAC”) in the US Treasury Department. “
The risk alert also identified “inadequate” AML procedures and documentation, and checked that “reports of suspicious activity are being submitted and customer due diligence is being carried out”.
