SEC to advisers: Get a firm grasp of digital currencies before making client recommendations

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The U.S. Securities and Exchange Commission (SEC) has urged brokers and investment advisers to have a firm grasp of digital currencies before advising retail clients to add them to their portfolios.

The securities regulator made the announcement via a staff bulletin that reiterated the duties of investment advisers to their customers. A keynote in the document was the specific mention of digital currencies that underscored the Commission’s desire to regulate the industry.

Investment brokers are expected to understand the risks associated with digital currencies and are required to bring them in line with the broader investment strategy of their clients, the SEC bulletin notes. Furthermore, before pitching digital currency investments, advisers are expected to understand the retail investor’s financial status, risk appetite, and previous investment.

Based on the two previous factors, the SEC’s documents urged advisers to provide “reasonably available alternatives” with a reasonable belief that the advice is in the client’s best interest.

“Certain products are more complex or have additional risk features, which may make it more difficult for firms and their financial professionals to develop an understanding,” the SEC said. “Without this understanding, firms and their financial professionals cannot have a reasonable basis to believe that their recommendation or advice aligns with a retail investor’s investment profile.”

Other factors that advisers are expected to keep an eye on include the direct and indirect costs associated with digital currency investment, the liquidity and volatility of the asset, and the projected performance under various market conditions. Investment brokers must also pay special attention to the tax implications of digital currencies on an investment portfolio.

In February, the SEC disclosed that it was mulling over a new rule that will mandate investment advisers to hold digital currencies under a qualified custodian, which could eliminate the bulk of digital currency platforms.

The SEC has been embroiled in a lengthy conflict with digital currencies over the presumptions that most of them are securities, requiring registration with the Commission. This position has fuelled its legal fiasco with Ripple Labs and triggered scathing criticisms from industry stakeholders, saying that the SEC is on a warpath to stifle innovation.

The securities regulator’s threat of legal action forced Coinbase (NASDAQ: COIN) to abandon its lending program, while its refusal of a spot BTC ETF has left investors in limbo. In terms of enforcement, the SEC announced an increase in the headcount of its digital currency unit to sustain its policing of the sector.

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