Adapting your RIA Compliance Program for Crypto
Jackie Hallihan and Matt Calabro
Compliance Solutions Strategies
January 5, 2022
The following blog post was written by Jackie Hallihan, Executive Director of Compliance Services, and Matt Calabro, Director of Institutional Services, Compliance Solutions Strategies (CSS).1
Estimated reading time: 5 minutes
Cryptocurrency investing represents a new and rapidly changing frontier for many registered investment advisers (RIAs). With over 80% of financial advisors having recently been asked by clients about cryptocurrencies,2 many Chief Compliance Officers may be asking themselves where to start with this new asset class.
As professionals who have worked in the compliance resources industry for over three decades, our approach to crypto is simple:
RIAs should apply the same compliance rigor to cryptocurrency as they do to every other investment, product offering or business line.
Taking this approach requires that compliance has a seat at the table from the very start, helping the firm holistically evaluate the impact of cryptocurrency investing on the firm’s business and client needs, compliance program, and regulatory requirements. While the full extent of the jurisdiction of the Securities and Exchange Commission (SEC) with respect to cryptocurrencies is uncertain, the SEC and its staff are clearly focused on the asset class. SEC staff have already provided guidance to RIAs seeking to invest in cryptocurrencies and have emphasized the need for RIAs to carefully evaluate the safety of cryptocurrency assets, satisfy their fiduciary duty, and implement controls tailored to the risks of cryptocurrencies. We trust that the path forward for RIAs investing in cryptocurrency involves adhering to the principles of fiduciary duty, including the duty of loyalty and duty of care, paired with long-established regulatory and compliance frameworks.
Adviser Compliance Package
CSS developed an “Adviser Compliance Package” exclusively for RIAs that sign up for Flourish Crypto.3 The package contains templates that you can adapt for your business, including:
- ADV and CRS language
- Policies and Procedures
- Client Disclosure
- Risk Disclosures
- Marketing disclosures
Contact Us to learn more
When implementing a cryptocurrency offering, an RIA needs to consider the impacts across its business and ensure that it dedicates the necessary resources to addressing any changes. Among the many compliance tasks that an RIA will need to undertake in order to offer cryptocurrency investing, the following six stand out:
6 Action Items When Bringing Cryptocurrency Investing to Your Clients:
- Analyze whether and how cryptocurrency fits into your business and client needs, including which cryptocurrencies will be offered, client objectives and suitability, the extent of the advisory services you will provide, and the compliance implications for each.
- Select service providers and conduct due diligence; in selecting a platform, consider the provider’s capabilities, reporting, integrations, and user experience; when selecting a custodian, consider best execution capabilities, safety and security, books and records, valuation practices, qualified custodian status and more.
- Update disclosures for Form ADV Part 1, Part 2A, and Form CRS, as well as client, risk and marketing disclosures.
- Amend your Policies and Procedures to incorporate cryptocurrency risks and controls, which may involve updating existing policies or introducing entirely new policies to cover Cryptocurrency and Digital Assets.
- Stay current on regulatory and compliance developments, including speeches by the SEC staff, Risk Alerts, and any proposed rulemaking
- Continue evolving your program to regularly evaluate your cryptocurrency offerings, monitor service providers, revise policies and procedures and conduct regular staff training.
We believe there is a clear path forward for RIAs looking to incorporate cryptocurrency within their business. Chief Compliance Officers need to be an integral part of the process, from product development to ensuring that the RIA continues to meet its fiduciary duty, by ensuring the firm applies the same compliance rigor to cryptocurrency as they do to other initiatives.
We look forward to working with compliance teams to develop strong compliance programs to meet growing market demands in the evolving, rapidly-changing digital asset world—a world where eligible clients can have appropriate access to a carefully thought out, structured cryptocurrency strategy.