Oct. 20, 2023
the proposed SEC rules lack clear guidelines for integrating digital asset custody into the SEC's overall enforcement program. Some uncertainties that need clarification: Prioritization - No guidance on how custody rule violations will be prioritized for enforcement action versus other SEC priorities. Referrals - Unclear if custody cases will be systematically referred to state/federal criminal authorities for additional penalties. Sanctions - No framework prescribed for determining appropriate civil monetary penalties or other sanctions for noncompliance. Examinations - Whether custody compliance will be incorporated into routine SEC registrant examinations is uncertain. Self-reporting - No specifics on how self-reporting of custody breaches may mitigate penalties. Whistleblowers - Custody violations are not highlighted as an area for whistleblower tips, reducing awareness. Enforcement tips - No mention of using analytics to target enforcement resources towards higher risk custody firms. Establishing clear custody enforcement policies, priorities and procedures will make oversight more consistent, effective and transparent. It would also clarify consequences of noncompliance for regulated entities. A detailed integration strategy will strengthen custody rule rollout and help the SEC proactively address emerging digital asset risks.