US Securities Regulator Asks Investment Advisors About Custody of Crypto Sources

NEW YORK, Jan 26 (Reuters) – The U.S. Securities and Exchange Commission is questioning registered investment advisers about their compliance with rules around custody of clients’ crypto assets, three sources familiar with them told Reuters. of the investigation.

The SEC has been questioning advisers’ efforts to follow agency rules regarding custody of clients’ digital assets for several months, but investigation has accelerated following the crypto exchange’s explosion FTX, the sources said. They spoke on condition of anonymity because the investigations are not public.

Advisors who manage clients’ digital assets typically use a third party to store them.

SEC staff are asking investment advisers for details about what companies have done to assess the custody of platforms, including FTX, one of the sources said. The app’s wide sweep, which has not previously been reported, is a sign that the scrutiny of the crypto industry by the top US markets regulator is extending to more traditional businesses on Wall Street.

An SEC spokesperson declined to comment.

By law, investment advisers cannot have custody of clients’ funds or securities if they do not meet certain requirements to safeguard the assets. One requires advisers to hold these assets with a firm deemed to be a “qualified custodian,” although the SEC does not maintain a specific list or offer licenses to firms to become such custodians.

The SEC investigation indicates that the regulator is targeting a long-standing problem for traditional companies that have been looking for ways to invest in crypto, lawyers told Reuters. The agency’s accounting guidelines have made it too capital-intensive for many lenders to hold digital assets on behalf of clients, limiting options for advisers seeking custodians.

“This is an obvious compliance issue for investment advisers. If you have custody of client assets that are securities, you must hold them with one of these qualified custodians,” said Anthony Tu-Sekine, Head of Seward and Kissel’s Blockchain and Cryptocurrency. Band.

“I think that’s an easy call for the SEC to make.”

Under Democratic leadership, the SEC has made crypto a priority area for enforcement, almost doubled the size of its crypto team last year. But the regulator is under new pressure to tackle crypto following a series of industry bankruptcies and the unveiling of US charges against founder and former FTX chief Sam Bankman-Fried for allegedly committed fraud. He pleaded not guilty.

Two of Bankman-Fried’s associates, former Alameda chief executive Caroline Ellison and former FTX chief technology officer Gary Wang, both pleaded guilty to defrauding investors and agreed to cooperate .

The SEC also polled FTX stock investors for details about their due diligence efforts when investing in the crypto exchange.

Reporting by Chris Prentice in New York Additional reporting by Elizabeth Howcroft in London and Hannah Lang in Washington Editing by Megan Davies and Leslie Adler

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