The Division of Examinations Publishes a Risk Alert on Marketing Rule Compliance
Summary: The Division of Examinations published the latest in its series of Risk Alerts related to advisers’ compliance with the Marketing Rule. The Risk Alert focused on Rule 206(4)-1(b) (covering testimonials and endorsements) and Rule 206(4)-1(c) (addressing third-party ratings). The Risk Alert highlighted deficiencies in advisers’ adherence to disclosure requirements and oversight and compliance practices with respect to testimonials and endorsements, and due diligence and disclosure requirements regarding third-party ratings.
Takeaway: The Risk Alert notes that “The Division continues to focus on advisers’ compliance with the Marketing Rule,” and we continue to see that focus in exams.
Best Practice Tip: Advisers should continue to ensure that their compliance programs and practices comply with all of the Marketing Rule’s requirements, with special attention given to the testimonials and endorsements and third-party ratings provisions that are highlighted in the Risk Alert.
Caroline Crenshaw Departs SEC
Summary: The Commission announced the departure of former Commissioner Caroline Crenshaw, a Democrat who had served since 2020.
Takeaway: Crenshaw’s exit leaves the five-member Commission with only three Commissioners, all Republicans. While Commissioner Crenshaw had little practical power in the minority, she issued a string of recent dissents illuminating her contrary perspective on recent Commission actions. Until additional Commissioners are named, the absence of a bi-partisan panel suggests that initiatives and policy moves prioritized by Chairman Atkins, such as those focused on market access, including for crypto assets, will go forward without Commission dissention.
Best Practice Tip: No action needed, but we will keep a close eye on how single-party control drives the Commission’s next moves.
Division of Trading and Markets Issues Statement on Custody of Crypto Asset Securities for Broker-Dealers
Summary: The Division of Trading and Markets issued a statement providing its views on the application of Rule 15c3-3(b)(1) to crypto asset securities. Also known as the “Customer Protection Rule,” this rule requires broker-dealers to promptly obtain and thereafter maintain physical possession or control of all fully paid and excess margin securities it carries for the account of customers. In broad strokes, the Division stated that it would “not object to a broker-dealer deeming itself to have ‘physical possession’” of a crypto asset security carried for a customer account if the broker-dealer: (1) has access to the crypto asset security and transfer capability; (2) implements policies and procedures to conduct and document an assessment of the crypto asset security’s distributed ledger technology; (3) does not deem itself to possess a crypto asset security if it is aware of any material security or operational problems or weaknesses with the distributed ledger technology or is aware of any other material risk posed to the broker-dealer by custodying the crypto asset security; (4) implements policies and procedures to protect private keys from theft, loss, or unauthorized or accidental use; and (5) implements policies and procedures for ensuring continued safekeeping and accessibility of the crypto asset security in the event of disruption.
Takeaway: The Division noted that the statement “is part of an effort to provide greater clarity on the application of the federal securities laws to crypto asset securities” and aligns with the Atkins Commission’s emphasis on clarifying the Commission’s role with respect to crypto. Importantly, the Division explained that it was “providing its views in response to requests from market participants” and that it would “continue to consider issues relating to broker-dealer’s custody of crypto asset securities and the feedback it has received.”
Best Practice Tip: While the Division’s statement is explicitly cabined to Rule 15c3-3(b)(1)—and thus separate from the Advisers Act Custody Rule—it underscores the Commission’s willingness to respond to requests and consider feedback from market participants. Advisers should identify areas where the Staff may be receptive to feedback and consider engagement with the Staff where appropriate.
Enforcement Update: Although it was generally all quiet on the Enforcement front in December, we continue to see a gradual uptick in investigative activity across the board, including in the private fund sector. As those investigations mature, stay tuned for important updates.