SEC Issues Statement on Custody of Digital Asset Securities by Special Purpose Broker-Dealers

On December 23, 2020, the Securities and Exchange Commission issued a statement and request for comment relating to custody of digital asset securities by broker-dealers, including certain conditional, time-limited relief for such arrangements. The statement will become effective 60 days after its publication in the Federal Register.

Most significantly, the SEC’s statement indicates that, for a five-year period, a broker-dealer will not be subject to an SEC enforcement action on the basis that the broker-dealer has deemed itself to have obtained and maintained physical possession or control of customer fully paid and excess margin digital asset securities for the purposes of paragraph (b)(1) of SEC Rule 15c3-3 (the Customer Protection Rule), which requires such possession or control, provided that the broker-dealer operates in compliance with the circumstances outlined in the SEC’s statement. Among other things, those circumstances require that the broker-dealer must limit its business to digital asset securities, implement policies and procedures reasonably designed to mitigate risks associated with its digital asset securities business, and provide customers with certain disclosures regarding risks of digital asset securities transactions.

The SEC also requested comment on a list of specific questions with respect to industry standards and best practices regarding custody of digital asset securities. Comments may be submitted electronically or in paper form.

The full statement and request for comment is available here.

SEC Announces New Internal Security-Based Swaps Joint Venture

On December 18, 2020, the Securities and Exchange Commission announced the creation of a joint venture among multiple SEC divisions and offices to coordinate roles related to the regulation of security-based swaps (SBS) and provide oversight of entities that will be required to register with the SEC (SBS entities). The SBS joint venture will be led by the Division of Examinations and the Division of Trading and Markets and will involve participation of staff from across the agency, including the Division of Enforcement, the Division of Economic Risk and Analysis, the Office of International Affairs and the Office of the Chief Data Officer.

In December 2019, the SEC adopted final rule amendments to effect a comprehensive SBS regulatory regime. As a result, beginning in November, SBS entities will be required to register with the SEC and be subject to certain regulatory requirements, including capital, margin and segregation. SBS entities will also have transaction reporting obligations. The SBS joint venture is intended to help position the SEC to effectively oversee the SBS market and monitor SBS transaction data for regulatory purposes.

The SEC press release is available here.