SEC to increase scrutiny of crypto trading firms and ESG funds in 2023

A flag outside the US Securities and Exchange Commission headquarters in Washington, DC, US, Wednesday, February 23, 2022.

Al Drago | Bloomberg | Getty Images

The Securities and Exchange Commission will increase its scrutiny of crypto-trading firms and investment advisers as well as environmental, social and governance, or ESG, funds, among other issues on its list of top regulatory priorities for 2023.

The annual list provides a roadmap for the SEC’s focus in the coming year and reflects areas it believes pose the greatest risk to investors and the health of US capital markets. Released Tuesday, this year’s list reflects “the changing landscape and associated risks in the securities market,” Richard R. Best, director of the division of examinations, said in a statement.

The priorities were released two months after the securities agency issued new guidance, requiring listed companies to disclose their exposure to the cryptocurrency market. It also follows SEC Chairman Gary Gensler’s warning to cryptocurrency firms to “come into compliance” with securities laws after crypto exchange FTX filed for bankruptcy.

This year, the SEC’s examination division will focus its attention on broker-dealers and registered investment advisers using new financial technologies, including crypto. Investigations will look at the “offer, sale, recommendation of or advice regarding the trading of crypto or crypto-related assets” and whether standards of care were met or adhered to by advisers and routinely updated as necessary.

The House Financial Services Committee also recently formed a task force to rein in what the panel’s Republicans call the SEC’s overreaction to ESG. The group aims to “combat the threat to our capital markets posed by those on the far left who are pushing environmental, social and governance (ESG) proposals,” according to their February 3 press release. The securities agency is committed to ensuring that ESG-related advisory services and funds invest in what the companies say they buy, according to the announcement.

Last year, the agency proposed new rules to ban misleading or deceptive claims on the names of ESG funds in the US and improved their disclosure requirements.

The division’s other priorities include:

• Investment Adviser and Investment Company Marketing Rules: Looking at whether they have implemented and adopted new rules designed to minimize adviser violations.
• Registered investment advisers to private funds: To assess compliance and other risks and whether advisers are complying with their duties as fiduciaries.
• Retail Investors and Working Families: Ensure that these groups receive advice in their best interests from broker-dealers and registered investment advisers.
• Information Security and Operational Resilience: Examines cyber security protocols as well as data protection for clients.

“In an era of growing markets, evolving technologies and new forms of risk, our Division of Examinations continues to protect investors,” Gensler said. “By executing against the 2023 priorities, the Division will help ensure compliance with federal securities laws and regulations.”

The annual priorities are compiled with input from the SEC Chairman and the agency’s commissioners, as well as from other SEC staff, federal financial regulators, investors and industry groups.