September 28, 2021

Volume XI, Number 271

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September 28, 2021

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September 27, 2021

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SEC Issues Statement and Request for Comment on Custody of Digital Assets by Special Purpose Broker-Dealers

An SEC statement and request for comment regarding the custody of digital asset securities by special purpose broker-dealers was published in the Federal Register on February 26, 2021. The reasons behind the statement and request were two-fold: first, to establish a five-year comment period to gain insight into the standards and practices of custodying digital asset securities before any future rulemaking; and second, to issue a statement detailing how broker-dealers can comply with Rule 15c3-3, the Customer Protection Rule, should they choose to custody digital asset securities during this period.

The SEC noted that broker-dealers who choose to custody digital asset securities will be subject to examination by FINRA and SEC staff. Further, any such broker-dealers will not be subject to  an enforcement action and will be deemed to comply with the Customer Protection Rule if they take the following actions with respect to custodying a digital asset security:

  • The broker-dealer must have access to the digital asset security and the capability to transfer it to the associated distributed ledger technology;

  • The broker-dealer must limit its business dealings exclusively to digital asset securities;

  • The broker-dealer must establish written policies and procedures reasonably designed to (1) conduct and document analysis of whether a particular digital asset is a “security”; (2) evaluate a digital asset security’s characteristics, ledger technology, and associated network before undertaking custody; (3) demonstrate that it has exclusive control over the digital asset securities it holds in custody; and (4) identify the steps it will take in the wake of certain events that could affect the firm’s custody (e.g., blockchain malfunctions, “51%” attacks and hard forks);

  • The broker-dealer may not undertake custody of a digital asset security if the firm is aware of any material security or operational problems or weaknesses with the distributed ledger technology and associated network used to access and transfer the digital asset security;

  • The broker-dealer must provide certain written disclosures to its customers regarding its compliance with the Customer Protection Rule and the risks of investing in or holding digital asset securities; and

  • The broker-dealer must enter into written agreements with its customers that set forth the terms and conditions of receiving, purchasing, holding, safekeeping, selling, transferring, exchanging, custodying, liquidating and otherwise transacting in digital asset securities.

The statement and request for comment is available here.

© 2021 Vedder PriceNational Law Review, Volume XI, Number 110
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About this Author

Shareholder

Wayne M. Aaron is a Shareholder at Vedder Price and a member of the firm’s Investment Services group and Corporate practice area in the New York office.

An experienced securities regulatory lawyer, Mr. Aaron represents financial services firms, management, and other personnel in regulatory and governmental investigations and internal investigations. His varied practice spans financial services advisory matters, broker-dealer regulation and enforcement, government and regulatory investigations, and FinTech.

Mr. Aaron...

212-407-7640
John Marten Investment Attorney Vedder Price Law FIrm
Shareholder

John S. Marten, a Shareholder in the Chicago office of Vedder Price, has substantial experience representing clients in the investment management industry.

As a member of the firm’s Investment Services group, Mr. Marten counsels clients on a wide variety of matters involving the application of the federal securities laws to investment companies, investment advisers and broker-dealers. He has significant experience counseling investment company clients with respect to new products and was recently involved in the creation of two mutual funds...

(312) 609 7753
Nathaniel Segal Investment Attorney Vedder Price Law Firm
Counsel

Nathaniel Segal is counsel at Vedder Price and a member of the Investment Services group. He focuses his practice on investment companies and investment advisers in connection with the organization and operation of investment products and services, including traditional mutual funds, closed-end investment companies (including interval funds and listed closed-end funds), variable insurance products and registered hedge funds, as well as mutual funds utilizing complex hedging and absolute return strategies. Mr. Segal has experience in conducting transactional due diligence...

(312) 609 7747
Jacob Tiedt,Vedder Price law firm investment services attorney
Shareholder

Jacob C. Tiedt is a Shareholder at Vedder Price and a member of the Investment Services group.

Mr. Tiedt’s practice includes the representation of registered mutual funds, closed-end funds and exchange-traded funds; private funds; investment advisers; and other financial institutions on a broad range of regulatory, governance and compliance matters. Mr. Tiedt regularly counsels clients on matters relating to SEC registration, disclosure and compliance; shareholder solicitation; NYSE, Nasdaq and FINRA regulation; corporate governance; and board administration. Mr....

312-609-7697
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