8 Tips for Advisors to Avoid Digital Asset Legal, Compliance Headaches

What You Need to Know

  • If an advisor wasn’t compliant and erred when recommending digital assets to clients that resulted in harm, you can expect it to be reported to SEC Enforcement.
  • Advisors must make sure they’re following their firm’s policies and procedures, as well as legal compliance requirements,
  • Custody is especially tricky when dealing with digital assets because a lot of ambiguity remains about the rules.

When it comes to digital assets, advisors must make sure they’re following their firm’s policies and procedures, as well as legal compliance requirements, to avoid legal woes. And that’s just for starters, according to Max Schatzow, an investment management and regulatory attorney who is a partner at the law firm Stark & Stark.

“I’m a digital asset realist. … Some might call me a skeptic,” he said Wednesday in the session “The Compliance Landscape: What Can I Tell My Clients About Bitcoin?” at the virtual Bitcoin for Advisors event.

If the SEC finds out you weren’t compliant and erred when recommending digital assets to clients that resulted in harm and investment losses, “you can almost guarantee you’re going to get referred to” SEC Enforcement, he warned.

Schatzow provided several tips for advisors to consider before they jump on the crypto bandwagon.

Here are the eight standout tips he provided:

1. Advisors must follow their firms’ policies and procedures.

If you own your own RIA firm, “there is really very little stopping you from talking about Bitcoin and recommending Bitcoin to your clients,” Schatzow said. But if you work for somebody else’s firm, you are “bound by” what that company’s rules are on crypto, he noted.

Those policies and procedures include recommendations regarding held away assets and on-platform assets; whether you have discretion over the client’s assets; custody, including the client’s wallet, key or password; and personal trading and reporting rules, Schatzow said.

2. Advisors must consider all risks to their clients.

“If you’re going to recommend an asset to a client, you’ve got to make sure you’ve done due diligence on the asset,” he warned. “You’ve got to understand the asset you’re recommending to clients” and any risks involved, including risks that are not exclusive to digital assets, he said, noting there is “a lot of volatility” with Bitcoin.

3. Pay close attention to ensure you are living up to your fiduciary duties as an advisor.

“You’ve got to know your client,” he said. “You’ve got to know their objective and, as a legal matter, you have to provide advice that is in their best interest” as a fiduciary.

Advisors should also have a strong note-taking system so that if a client insists that you make a risky investment for them that ends up costing them a lot of money, you can prove the client understood the risk and wanted it anyway, he explained.

The price that you execute a digital asset trade at is also important, along with any other costs, he said.

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