SEC Warns Advisers to Apply ‘Heightened Scrutiny’ When Recommending Crypto Assets

The US Securities and Exchange Commission (SEC) has issued a warning to investment advisers, urging them to exercise increased caution when recommending cryptocurrency assets to investors. The regulator advises advisers to conduct thorough due diligence and ensure that any investments align with the client’s investment goals and risk tolerance. The SEC’s warning comes amid a surge in the popularity of cryptocurrencies, prompting concerns over their lack of regulation and potential risks to investors. Advisers who fail to comply with the regulator’s guidance may face disciplinary action.

The U.S. Securities and Exchange Commission (SEC) has urged finance professionals to exercise caution when recommending complex or risky investment products, including crypto assets. The regulatory body emphasized the importance of fully understanding the risks associated with such products before offering them to clients.

The SEC highlighted how some investment products possess added complexities and risk characteristics that may make it difficult for financial experts to fully understand their features and risks. The agency argues that if firms and financial professionals cannot establish a reasonable basis for believing that these products are in the best interest of retail investors, they should exercise heightened scrutiny in recommending them.

Some of the investment products that warrant heightened scrutiny, according to the SEC, include inverse or leveraged exchange-traded products, investments traded on margin, derivatives, crypto asset securities, penny stocks, private placements, asset-backed securities, volatility-linked exchange-traded products, and reverse-convertible notes.

Apart from having a comprehensive understanding of investment products, SEC recommends that firms and financial professionals acquire information about the retail investor, including specific trading objectives that are consistent with the product’s description, and/or the capacity to tolerate heightened risk of financial loss. However, the SEC notes that having such an objective or ability does not automatically imply that the product is in the retail investor’s best interest.

In line with the SEC’s recommendations, firms and financial professionals must still have “a reasonable basis” to believe that the investment is in the best interest of the retail investor, taking into account all relevant facts and circumstances. Failure to comply with securities law can attract severe penalties, as seen in the recent charges filed by SEC against Bittrex.

Since Gary Gensler took over as the agency’s chair two years ago, the SEC has filed about 1,500 enforcement actions including actions against rampant noncompliance in the crypto market. Some players in the crypto industry have criticized the SEC for its approach to digital asset regulation, arguing that they do not help the industry or regulators. Nevertheless, firms and professionals must comply with regulatory requirements if they wish to avoid stern actions from regulators.

In conclusion, the SEC’s recommendation to exercise heightened scrutiny when recommending complex or risky products such as crypto assets underscores the need for finance professionals to have a comprehensive understanding of the risks associated with such products. As the crypto industry continues to grow, it is essential to comply with regulators’ requirements to maintain a level playing field and protect investors’ interests. Stay tuned for more updates on crypto regulation.

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