SEC asks Wall Street investment advisers about crypto custody of clients

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(Kitco News) – The Securities and Exchange Commission (SEC) is extending its examination of crypto deeper into the traditional financial sector. According to a Reuters report published on January 26, the regulator has opened investigations into registered investment advisers to determine whether they are violating rules governing the custody of clients’ crypto assets.

Investment advisers cannot legally retain custody of client funds or securities if they do not meet specific requirements, including that advisers hold assets with a firm deemed to be a qualified custodian.

“This is a clear compliance issue for investment advisers,” Anthony Tu-Sekine, head of the Blockchain and Cryptocurrency group at Seward and Kissel said in the report. are securities, you have to keep those with one of these qualified custodians. I think that’s an easy call for the SEC to make.”

The problem for traditional financial companies is that finding qualified custodians is not at all an easy task. Several lawyers told Reuters that SEC accounting guidelines have made it too capital-intensive for many lenders to hold digital assets on behalf of clients, limiting the custodial options advisers can access. To complicate matters further, the SEC does not maintain a list of custodians it deems qualified, nor does it offer a licensing process for companies to be recognized as qualified.

On December 8, the SEC issued a directive to all publicly traded companies in the United States warning them that they must review their disclosure obligations with respect to crypto.

Recent bankruptcies and financial difficulties of crypto asset market participants have caused widespread disruption in these markets, they wrote. Companies may have disclosure obligations under federal securities laws related to the direct or indirect impact that these events and collateral events have had or may have on their business.

The SEC division of Corporation Finance (DCF) wants companies to assess their information in order to provide investors with specific and personalized information on market events and conditions, the company’s situation in relation to [them], and the potential impact on investors. The DCF added that companies with ongoing reporting obligations should check whether their existing information needs to be updated.

The DCF also shared a sample letter containing 16 areas of questions they would ask companies about their exposure to crypto markets, including a company’s exposure to counterparties and other market participants; risks relating to a company’s liquidity and its ability to obtain financing; and risks related to legal proceedings, investigations or regulatory impacts on the crypto asset markets.

The SEC has recently come under scathing criticism from lawmakers and market participants for its apparent failure to shield investors from the collapse of FTX and Alameda Research last month, despite the chairman’s high-profile meetings. from the SEC, Gary Genslers, with former FTX CEO Sam Bankman. -Fried.

On December 6, New York Congressman Ritchie Torres wrote a letter to Gene Dodaro, Comptroller General of the United States Government Accountability Office (GAO), in which he asked Dodaro to conduct an independent review of the failure of the SEC to protect the investing public from FTX’s gross mismanagement and malfeasance.

Torres wrote that Gensler is singularly responsible for the regulatory failures surrounding FTX’s collapse, which caused billions in losses to creditors and customers.

After the collapse of FTX, the SEC announced that it was in fact investigating the exchange for possible violations of money laundering laws.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. This is not a solicitation to trade commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for loss and/or damage resulting from the use of this publication.

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