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Volume XII, Number 278

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SEC Announces 2022 Examination Priorities, Includes Crypto-Assets

The U.S. Securities and Exchange Commission (“SEC”) has announced its examination priorities for the fiscal year 2022. Among them is crypto-assets. Specifically, the SEC is targeting robo-advisers, fractionalization, and other crypto-custody arrangement practices.

Robo-Advisers

The SEC noted that there has been a significant increase in the number of robo-advisers. Robo-advisors are registered investment advisors (“RIAs”) that provide automated digital investment advice to their clients, including through the use of mobile apps.

The SEC has previously released guidance for robo-advisers and provided several considerations that robo-advisers should keep in mind when conducting business. And in 2018, the SEC brought the first action against a robo-adviser for making false statements about investment products and publishing misleading advertising.  In 2022, SEC examiners will be reviewing the unique risks presented by these advisers and whether these risks are reasonably accounted for in the RIA’s regulatory compliance programs.

Fractionalization

This year, SEC examiners will also target fractional shares of crypto-assets. Fractionalization allows multiple people to hold (and trade) a share of an asset. In a typical format, the share is represented by an NFT that represents a fraction of the ownership of or revenue rights associated with the asset. In some cases, this may meet the Howey test, which the SEC uses to assess whether a digital asset is a security. In short, whether there is an investment of money in a common enterprise with profits to come solely from the efforts of others. In 2019, the SEC released guidance applying the Howey test to digital assets but it has not been updated since. The SEC has reportedly sent subpoenas related to the investigation and is particularly interested in information about fractional NFTs. As set forth in the exam priorities, SEC examiners will assess whether broker-dealers and RIAs: (1) have processes and controls in place that are consistent with publicly disclosed information and the standard of conduct owed to investors, as well as other regulatory obligations; (2) are giving advice and recommendations, including through algorithms, that are consistent with their investors’ investment strategies and the standard of conduct owed to such investors; and (3) have controls in place that take into account the unique risks associated with these assets.

Custody Arrangements

This year, SEC examiners will assess the offer, sale, recommendation, advice, and trading of crypto-assets, including the suitability of any crypto trading recommendations. Specifically, the SEC will review whether market participants involved 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; and (2) routinely review, update, and enhance their compliance practices, including crypto-asset wallet reviews, digital asset custody practices and safeguards, anti-money laundering reviews, valuation procedures, risk disclosures, and operational resiliency practices.

Additionally, the SEC will also examine mutual funds and ETFs offering exposure to crypto assets to assess compliance, liquidity, and operational controls around portfolio management and market risk.

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XII, Number 90
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About this Author

Sarah Aberg Government Contracts Attorney Sheppard Mullin Law Firm New York
Special Counsel

Sarah Aberg is special counsel in the White Collar Defense and Corporate Investigations Group in the firm's New York office.

Areas of Practice

Sarah's practice encompasses litigation, internal investigations and white collar defense, with a focus on financial services and securities. She has conducted multiple criminal trials and numerous internal investigations into a wide variety of allegations, including mail and wire fraud, mortgage fraud, insider trading, market manipulation, money laundering,...

212-634-3091
Associate

Gabriel is an Associate on the Telecom team and the Co-Lead Associate on the Blockchain and Digital Assets team in the firm’s Washington, D.C. office. He is a Blockchain Law Professional as Certified by the Blockchain Council.

At Sheppard Mullin, Gabriel assists the Telecom team in all aspects of communications law and regulation including, satellites, spectrum, 5G implementation, media companies, and new technologies. He assists the Blockchain and Digital Assets team in legal issues relating to the use of blockchain technology, social media, internet, video games, online gambling,...

202-747-2194
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