SEC Guidance

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On March 3, 2021, the U.S. Securities and Exchange Commission (“SEC”) Division of Examinations (the “Division”)—formerly the Office of Compliance Inspections and Examinations—released its 2021 Examination Priorities (“2021 Priorities”).  The 2021 Priorities generally retain perennial risk areas as the Division’s core focus, but do include several new and emerging risk areas reflecting broader policy shifts under new SEC leadership.

The 2021 Priorities include:  retail investors; information security and operational resilience; financial technology (“Fintech”), including digital assets; anti-money laundering; transition from the London Inter‑Bank Offered Rate (“LIBOR”); several areas covering registered investment advisers and investment companies; market infrastructure; and oversight of the Financial Industry Regulatory Authority and Municipal Securities Rulemaking Board programs and policies.  Although not formal priorities, the Division will also focus on climate-related risks and environmental, social and governance (“ESG”) matters in light of recent market developments and broader attention in these areas.
Continue Reading Turning the Page: Highlights of the SEC’s Division of Examination’s 2021 Priorities

On September 15, 2020, the Securities and Exchange Commission issued a cease‑and‑desist order against Unikrn, Inc. concerning its 2017 initial coin offering  of UnikoinGold .  The SEC found that the Unikrn ICO violated the prohibition in Section 5 of the Securities Act of 1933 against the unregistered public offer or sale of securities.  The SEC imposed several remedies, including requiring Unikrn to permanently disable the UnikoinGold token and a civil money penalty of $6.1 million.
Continue Reading SEC Issues Enforcement Action Against Unikrn, Inc. for its ICO, Prompting Rare Public Dissent from Commissioner Hester Peirce

On January 7, 2020, the U.S. Securities and Exchange Commission (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) released its 2020 Examination Priorities (“2020 Priorities”).  While at first blush the themes appear consistent with and predictable from their 2019 priorities, on closer read OCIE has provided some new insights and some unexpected focus areas.  The themes for the 2020 Priorities are:  retail investors, information security, financial technology (“Fintech”) and innovation (including digital assets and electronic investment advice), several areas covering registered investment advisers and investment companies, anti-money laundering, market infrastructure (clearing agencies, national securities exchanges, alternative trading systems, transfer agents), and oversight of the Financial Industry Regulatory Authority and Municipal Securities Rulemaking Board programs and policies.  OCIE also stressed the challenges it faced in light of last year’s government shutdown and resource constraints, as the Division of Enforcement did in its 2019 Annual Report (see our analysis here), and the challenges in examining non-U.S. advisers due to limits that foreign data protection and privacy laws may place on cross-border information transfers.  In this post, we analyze the highlights in and our takeaways from the 2020 Priorities.
Continue Reading From the Expected to the Surprises: Highlights of SEC OCIE’s 2020 Priorities

On October 11, 2019, the leaders of the Commodity Futures Trading Commission, Financial Crimes Enforcement Network, and Securities and Exchange Commission issued a joint statement to remind businesses that engage in digital asset activities of their anti-money laundering (“AML”) and countering the financing of terrorism (“CFT”) obligations under the Bank Secrecy Act (“BSA”).

As market…

On September 18, 2019, the Securities and Exchange Commission (“SEC”) filed its first civil suit alleging violations of broker-dealer registration requirements in U.S. digital asset markets.  In a case filed in the U.S. District Court for the Central District of California, the SEC alleged that Defendants ICOBox and its founder, Nikolay Evdokimov, illegally conducted an unregistered public securities offering for their 2017 initial coin offering (“ICO”), and have operated an unregistered brokerage service facilitating the launch of ICOs in digital asset securities since 2017.
Continue Reading SEC Files First Suit Against Alleged Unregistered Broker-Dealer Operating in Digital Asset Markets

On July 25, 2019, staff of the Securities and Exchange Commission (“SEC”) granted its second no-action letter in the digital asset space to Pocketful of Quarters, Inc. (“POQ”), permitting POQ to sell digital tokens (“Quarters”) recorded on the Ethereum blockchain without satisfying registration requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934 (the “Acts”). Like the SEC’s prior no-action letter to TurnKey Jet, Inc. (“TKJ”), which permitted TKJ to sell digital tokens pegged to $1.00 for the limited purpose of purchasing air charter services, Quarters will also be sold at a fixed price and limited to a purely consumptive purpose within the Quarters platform.

Due to these similarities, the POQ letter does little to clarify the SEC staff’s most recent guidance, released with the TKJ letter on April 3, 2019, that lists characteristics of a digital token that may affect its classification as a “security” under the Acts (the “Framework”).[1] The POQ letter merely reemphasizes that projects where the platform is already fully developed and the digital asset is subject to extensive restrictions on secondary trading, like TKJ, are more likely to fall outside the scope of federal securities laws.
Continue Reading SEC Provides Second No-Action Letter in the Digital Asset Space

On April 3, 2019, staff of the Securities and Exchange Commission released (1) a framework providing principles for analyzing whether a digital asset constitutes an investment contract, and thus a security, as defined in SEC v. W.J. Howey Co. and (2) a no-action letter permitting TurnKey Jet, Inc., without satisfying registration requirements under the Securities…

On March 12, the SEC’s Division of Investment Management (“Division”) published a letter from Paul G. Cellupica, Deputy Director and Chief Counsel of the Division, to Karen Barr, President and CEO of the Investment Advisor Association, laying out a number of issues under Rule 206(4)-2 (the “Custody Rule”).  The letter included a request for information on possible revisions to the Custody Rule under the Investment Advisers Act of 1940 focused on a series of open-ended questions on the intersection between digital assets and the Custody Rule.
Continue Reading SEC Seeks Comments on Key Issues Around Custody of Digital Assets

On February 20, the Securities and Exchange Commission (the “SEC” or “Commission”) issued a cease-and-desist order against Gladius Network LLC (“Gladius”) concerning its 2017 initial coin offering (“ICO”).  The SEC found that the Gladius ICO violated the Securities Act of 1933’s (“Securities Act”) prohibition against the public offer or sale of any securities not made pursuant to either an effective registration statement on file with the SEC or under an exemption from registration.[1]  While this is far from the first time that the SEC has found that a particular ICO token meets the definition of a “security” under the Securities Act,[2] this is notably the first action involving an ICO token issuer that self-reported its potential violation.  Due to this, and Gladius’s cooperation throughout the investigation, the SEC stopped short of imposing any civil monetary penalties among its ordered remedial measures.
Continue Reading SEC Issues First ICO Enforcement Action Against a Self-Reporting Token Issuer

On December 21, 2018, the Securities and Exchange Commission (SEC) announced settlements with two robo-advisors, Wealthfront Advisers LLC (Wealthfront) and Hedgeable Inc. (Hedgeable), for making false statements about investment products and engaging in misleading advertising in violation of the Investment Advisors Act of 1940 (Act). These settlements mark the SEC’s first enforcement actions against robo-advisors and serve as a reminder that, although technology may change how an investment adviser operates, the SEC expects full compliance with all requirements of the Act.
Continue Reading The SEC Announces First Enforcement Actions Against Robo-Advisors