The SEC Announces its 2020 Examination Priorities

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On January 7, 2020, the SEC issued its annual list of examination priorities for the upcoming year: https://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2020.pdf

Once again, FinTech and Digital Assets made the list as top focus areas. The SEC remains concerned that products based on new financial technologies pose various risks to the integrity of the global capital markets, including to retail investors who may not adequately understand the differences between these new assets and more traditional products.

In addition, as registered entities increasingly rely on the use of third-party service providers and other vendors, the SEC will be looking to see that an organization is balancing the benefits of improved expertise and effectiveness along with monitoring the additional challenges and organizational risks presented by utilizing third party entities. SEC examinations will be focusing on oversight practices related to certain service providers and network solutions, including those leveraging cloud-based storage. So choose carefully when engaging a critical third party service provider and be prepared to maintain a healthy ongoing due diligence oversight of that vendor’s processes, especially if that vendor handles sensitive customer data and/or financial information on your behalf. Requesting and reviewing your vendor’s control environment reports such as SOC 1 or SOC 2 audit reports would be among industry best practices.

Specific to the digital assets space, the SEC’s examination priorities for 2020 are designed to assess: (1) investment suitability, (2) portfolio management and trading practices, (3) safety of client funds and assets (i.e., “custody”), (4) pricing and valuation, (5) effectiveness of compliance programs and controls, and (6) supervision of employee outside business activities. While these issues are most relevant to the SEC’s examinations of regulated entities with retail investors, they may also broadly apply to examinations of any regulated entity that engages in the digital assets space (i.e., hedge funds, private fund advisors, third party service providers).

Walking the Talk with an Olive Branch

The SEC is serious about deepening resources for its FinTech examination program. Recent staffing additions and data analytics improvements, along with information sharing with other regulatory agencies, have increased the SEC’s ability to tailor a risk-based examination program to monitor industry trends and focus areas. The good news is that SEC industry outreach towards the emerging sector has also taken a friendlier tone lately, and continues to be an area of opportunity for market participants to share best practices and solutions to help shape regulatory problem solving. Just put some thought into doing the right thing, and be able to show how you got there.

— Deborah Djeu, General Counsel & CCO, Lumina

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