On October 16, the Securities and Exchange Commission’s Division of Examinations (the Division) released its 2024 Examination Priorities report. The report highlights that future examinations will focus on “risk areas impacting various market participants,” emphasizing risks posed by products and services: (1) related to cryptocurrency; and (2) that leverage emerging technology. In addition, the report indicates that examinations will focus on market participants’ compliance with Anti-Money Laundering (AML) laws.
Examining Cryptocurrency and Emerging Financial Technologies
The report details the Division’s intent to focus on the offer, sale, recommendation of, and trading of crypto assets. Specifically, examinations will evaluate:
- Whether registrants meet and follow their standards of conduct when advising on crypto products;
- Routine review, update, and enhancement of compliance practices (including crypto asset wallet reviews, custody practices, Bank Secrecy Act (BSA)_ compliance reviews, and valuation procedures), risk disclosures, and resiliency practices;
- Whether advisers are complying with the custody requirements under the Advisers Act (applicable only to crypto assets that are funds or securities); and
- Whether technological risks associated with the use of blockchain and distributed ledger technology have been addressed.
In addition to prioritizing participants dealing with cryptocurrencies, the Division will focus on broker-dealers and investment advisers leveraging emerging technology, i.e. broker-dealer mobile applications and advisers who provide automated investment advice to clients.
Compliance with the Bank Secrecy Act
Regarding AML, the Division noted that the BSA requires financial institutions, including broker-dealers and certain registered investment companies, to establish AML programs tailored to address risks associated with the firm’s location, size, and activities. The compliance program also must be designed to achieve compliance with the BSA. As stated in the report, the Division will continue to review whether broker-dealers and investment companies are:
- Appropriately tailoring their AML program to their business model and associated AML risks;
- Conducting independent testing of the AML program;
- Establishing an adequate customer identification program, including for beneficial owners of legal entity customers; and
- Meeting suspicious activity report (SAR) filing obligations.
The Division also will ensure broker-dealers and advisers are monitoring Office of Foreign Assets Control sanctions and ensuring compliance with such sanctions.
The Division’s focus on AML is hardly surprising. On July 31, the Division published a risk alert outlining deficiencies it had observed in broker-dealers’ compliance with AML laws, which followed its March 2021 risk alert regarding AML compliance by broker-dealers and mutual funds. Like the prior alerts, this report focuses on deficiencies observed regarding independent testing of broker-dealers’ AML programs, employee training, and know-your-customer procedures.
For market participants leveraging digital assets or emerging technologies, the Division’s report makes clear the SEC intends to devote significant resources into evaluating the impact of those technologies on the market and market participants. Proactively implementing compliance measures is essential for all industry participants hoping to complete future examinations without being referred to SEC enforcement staff.