SEC Targets Unregistered Dealer Activity in Crypto Asset Markets
Blockchain
Regulatory Exams and Oversight
October 31, 2024
The Case
The Securities and Exchange Commission has charged an entity with operating as an unregistered dealer in more than $2 billion of crypto assets offered and sold as securities, violating the registration requirements of the federal securities laws designed to protect investors.
Acting Chief of the SEC’s Crypto Assets and Cyber Unit (CACU) Jorge G. Tenreiro stated, “The federal securities laws require all dealers in all securities to register with the Commission, and those who operate in the crypto asset markets are no exception. Despite frequent protestations by the industry that sales of crypto assets are all akin to sales of commodities, our complaint alleges that the company, the respective issuers, and objective investors treated the offer and sale of the crypto assets at issue in this case as investments in securities, and the company profited from its dealer activity in these assets without providing investors and the market with the important protections afforded by registration.”
Regulatory Implications
The SEC’s enforcement underscores the necessity for participants in the crypto asset markets to adhere to federal securities laws, regardless of their perception of crypto assets as commodities or investments. Entities engaging in dealer activities, such as providing liquidity or trading on third-party platforms, are reminded that they must register with the SEC to operate lawfully.
This case is a warning to entities involved in crypto asset transactions that any failure to follow registration and operational standards exposes them to significant legal and financial risks. The SEC is actively monitoring this space to ensure that investors receive the protections afforded by securities laws, particularly regarding transparency and disclosure.
Practical Guidance for Firms
Entities involved in the crypto asset markets must carefully evaluate their operations to determine whether they fall under SEC regulations as dealers. Adopting proactive compliance measures can reduce legal exposure and align with regulatory expectations. Key steps include:
Review Business Activities: Conduct an internal review of your operations to identify activities that may qualify as dealer functions, such as providing liquidity or executing trades.
Analyze Asset Classification: Assess whether the crypto assets you handle may be considered securities under the Howey Test or other SEC guidance.
Strengthen Compliance Systems: Develop or enhance compliance policies to monitor and mitigate risks associated with trading crypto assets that may be classified as securities.
Consider Registration: If your activities meet the SEC’s criteria for a dealer, initiate the registration process to avoid potential enforcement actions.
Engage with Experts: Collaborate with legal and regulatory professionals to ensure your practices align with evolving SEC expectations for the crypto asset market.
InnReg specializes in helping companies navigate regulatory challenges in the crypto market. We provide tailored compliance solutions and assistance with SEC registration processes.
RIAs
The SEC recently brought settled enforcement actions against two registered investment advisers for failing to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information (MNPI), in violation of Section 204A of the Investment Advisers Act of 1940 (Advisers Act) and the Compliance Rule.
RIAs
On Sep. 4, 2024, FinCEN published a final rule (Final Rule) adding certain RIAs and ERAs (collectively, Covered Advisers) to the definition of “financial institution” under the regulations implementing the BSA, and imposing on Covered Advisers broad AML and CFT program requirements, as well as other BSA recordkeeping and reporting requirements.
Broker-Dealers
On November 22, the SEC announced (here) that broker-dealers Webull Financial LLC, Lightspeed Financial Services Group LLC, and Paulson Investment Company, LLC agreed to settle charges that they filed with law enforcement SARs that failed to include required information.
