Hong Kong’s SFC Publishes Circular for Virtual Asset Platform Regulations with Stricter Conduct Standards
On 16 January 2025, the Hong Kong Securities and Futures Commission (HK SFC) published “Circular to Licensed Corporations, SFC-licensed Virtual Asset Service Providers and Associated Entities’ for Hong Kong based Virtual Asset Trading Platforms (VATPs) detailing stricter conduct standards. These measures, detailed in an official circular and appendices (Appendix 1 and Appendix 2), were introduced following inspections of VATP applicants under the deemed licensing framework. The aim is to enhance the security, compliance, and operational integrity of platforms operating in Hong Kong.
- The focus area of the Circular are Cybersecurity, client asset protection, Know-Your-Client (KYC) compliance, and financial management.
- Cybersecurity requirements include advanced network segmentation and privileged access management frameworks, eeal-time monitoring through 24/7 security operations centres, strong encryption for data storage and transmission to replace outdated methods and automated systems to detect unauthorised access to client accounts.
- Client Asset Protection requirement are strict compliance with the “98/2 cold-to-hot wallet ratio,” ensuring 98% of client assets are stored in cold wallets, wallet address whitelisting and private key storage in certified environments within Hong Kong, detailed recovery plans to restore custody systems within 12 hours of disruption, insurance policies covering 50% of assets in cold wallets and 100% in hot wallets.
- KYC and Access Controls requirements include advanced geolocation tools to block access from restricted, rigorous monitoring and documentation of compliance efforts to ensure authorised access only.
- Financial Management requirements include immediate deposit of client funds into segregated accounts and dual signatory arrangements for bank transactions to minimise fraud risks.
- Platforms must implement these enhanced standards without delay, though no specific compliance deadline has been set.
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US SEC Announces Departure of International Affairs Director YJ Fischer
On 16 January 2025, the US SEC announced the departure of YJ Fischer, Director of the Office of International Affairs (OIA), effective 20 January 2025. Fischer has served in the role since August 2021.
- Fischer has over 20 years of experience in international negotiations in both public and private sectors. She held senior roles at the US State Department during the Obama administration, contributing to critical infrastructure in Iraq, UN-led negotiations on Syria, and the Iran nuclear agreement.
- In the private sector, she worked on global policy at YouTube, facilitated start-up market entries, and secured multimillion-dollar government R&D investments. Fischer practised law at Kirkland & Ellis, earning recognition for her pro bono work.
- Her achievements at the US SEC, strengthened cooperation with foreign regulators, securing access to witness testimony and audit workpapers in jurisdictions like China and Hong Kong.
- She expanded the US SEC’s technical assistance program, introducing remote training and broadening its curriculum to emphasise economic growth through capital formation.
- She is a recipient of the US State Department’s Meritorious Honor Award and Kirkland & Ellis Pro Bono Service Award and holds undergraduate and law degrees from Columbia University.
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US SEC Charges Two Sigma with Failing to Address Model Vulnerabilities, Imposes $90 Million Penalty
On 16 January 2025, the US SEC published order instituting administrative and cease-and-desist proceedings, pursuant to section 21c of the United States Securities Exchange Act of 1934 and sections 203(e) and 203(k) of the United States Investment Advisers Act of 1940, making findings, and imposing remedial sanctions and a cease and-desist order and settled charges against Two Sigma Investments LP and Two Sigma Advisers LP (collectively, Two Sigma) for breaching fiduciary duties and failing to address known vulnerabilities in their investment models. The firms also reimbursed $165 million to affected funds and accounts.
- US SEC alleges that from March 2019 to October 2023, Two Sigma failed to address material vulnerabilities in its algorithmic investment models, allowing unauthorised changes to model parameters.
- These changes resulted in $400 million in overperformance for some funds and $165 million in underperformance for others.
- The firm violated whistleblower protection rules by requiring employees to sign agreements preventing them from reporting potential securities violations to regulatory agencies.
- Two Sigma agreed to pay $90 million in civil penalties, split equally between its two entities. The firm voluntarily reimbursed $165 million to impacted funds in December 2023 and January 2024.
- Additional violations include Security vulnerabilities in a database storing key model parameters were identified in 2019 but not addressed until May 2022, after a trading disruption.
- Whistleblower restrictions in employee separation agreements remained in effect until February 2024, impeding regulatory compliance.
- As remedial actions Two Sigma updated model governance policies, revised separation agreements, and enhanced employee training on whistleblower protections.
- The firm cooperated fully with the US SEC investigation and provided access to internal processes.
- Vulnerabilities were identified in March 2019, and the US SEC investigation began in 2022. Corrective measures were implemented in late 2023, leading to the settlement on 16 January 2025.
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US SEC Sanctions LPL Financial with $18 Million Fine for AML Violations
On 17 January 2025, the US SEC announced that LPL Financial LLC published an order instituting administrative and cease-and-desist proceedings, pursuant to Sections 15(b) and 21c of the United States Securities Exchange Act of 1934 and Section 203(e) of the United States Investment Advisers Act of 1940, making findings, and imposing remedial sanctions and a cease-and-desist order thereby sanctioning LPL Financial LLC, a leading broker-dealer and investment adviser, for extensive anti-money laundering (AML) violations nd thereby are required to pay an $18 million fine, with additional remedial measures required to address its compliance shortcomings.
- US SEC alleges that between May 2019 and December 2023, LPL failed to enforce its AML policies, including verifying customer identities, closing high-risk accounts, and adhering to federal regulations under Section 17(a) of the United States Securities Exchange Act of 1934 and SEC Rule 17a-8.
- US SEC Over 7,300 non-compliant accounts remained open by 2022, despite policies requiring closure after 60 days of failed identity verification.
- Thousands of cannabis-related and foreign accounts, prohibited by LPL’s AML policies, remained active with significant assets.
- Internal audits repeatedly flagged deficiencies in LPL’s AML framework, including inadequate staff training and weak record-keeping.
- US SEC ordered that LPL must pay a civil penalty of $18 million and cease further violations.
- A third-party compliance consultant will oversee LPL’s AML policy review and provide detailed reports to the SEC, with the first report due within 45 days.
- The consultant will conduct ongoing evaluations for the next year to ensure improvements in customer identification, due diligence, and compliance enforcement.
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US SEC Fines Digital Currency Group and Former Genesis CEO for Misleading Investors
On 17 January 2025, the US SEC published order instituting cease-and-desist proceedings, pursuant to section 8a of the United States Securities Act of 1933, making findings, and imposing a cease-and-desist order and announced a settlement with Digital Currency Group Inc. (DCG) and its subsidiary Genesis Global Capital’s former CEO, Soichiro “Michael” Moro, for misleading investors about the financial health of Genesis. The parties will pay a combined $38.5 million in civil penalties for misleading investors about Genesis’s financial health following the collapse of Three Arrows Capital (TAC).
- US SEC alleges DCG and Moro negligently misrepresented Genesis’s financial condition after TAC defaulted on a $2.4 billion loan in June 2022, concealing the severity of the resulting liquidity crisis.
- Genesis suffered a $1 billion shortfall as cryptocurrency prices fell, yet falsely claimed its balance sheet was “strong” on 15 June 2022.
- On 30 June 2022, DCG issued a $1.1 billion promissory note to bolster Genesis’s balance sheet without sufficient disclosure.
- Moro misleadingly tweeted in July 2022 that DCG had assumed Genesis’s liabilities, implying a capital injection that never occurred.
- As Financial Penalties, DCG will pay $38 million in penalties alongwith that Moro will pay $500,000 and these penalties will be directed to the US Treasury.
- Both DCG and Moro consented to Cease-and-Desist Orders under Section 8A of the United States Securities Act of 1933 without admitting or denying the findings.
- Genesis suspended operations in November 2022 and filed for bankruptcy in January 2023, unable to meet withdrawal requests.
- DCG must pay within 14 days and Moro within 30 days, with interest accruing on unpaid amounts. Both are barred from contesting findings in related investor actions.
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Caroline D. Pham Appointed Acting Chairman of US CFTC
On 20 January 2025, Commissioner Caroline D. Pham was unanimously appointed Acting Chairman of the US Commodity Futures Trading Commission (US CFTC), succeeding Rostin Behnam, who will remain a Commissioner until his departure on 7 February 2025.
- Pham was nominated to the US CFTC on 12 January 2022, confirmed by the Senate on 28 March 2022, and began serving as Commissioner on 14 April 2022.
- She has 20 years of expertise in derivatives, capital markets, digital assets, and regulatory frameworks.
- She led efforts to expand market access, enhance American competitiveness, and optimise regulatory policies for efficiency and liquidity.
- She proposed the US CFTC’s digital asset markets pilot programme, earning a place on CoinDesk’s Most Influential 2023 list.
- She sponsored 14 recommendations on market reforms, including Treasury market structure, central counterparty resilience, and digital asset taxonomy.
- Advised global policymakers, industry leaders, and central banks on systemic risk, prudential regulation, and market disruptions.
- She held senior roles at Citigroup, overseeing global market structure and digital asset initiatives and served as Special Counsel and Policy Advisor to former US CFTC Commissioner Scott O’Malia and worked with the US SEC and OCC.
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US SEC Unveils Crypto 2.0 Task Force to Reform Digital Asset Regulation
On 21 January 2025, the US Securities and Exchange Commission (US SEC) launched the Crypto 2.0 Task Force to reform the regulation of digital assets. Led by Commissioner Hester Peirce, this initiative aims to balance investor protection, innovation, and market integrity.
- The task force aims to transition the US SEC from a reactive enforcement approach to a proactive regulatory framework for digital assets.
- Key objectives include clarifying regulatory obligations, developing feasible registration pathways, and enhancing transparency and compliance.
- The team includes Richard Gabbert as Chief of Staff and Taylor Asher as Chief Policy Advisor, supporting Commissioner Peirce’s leadership.
- The initiative addresses criticisms of regulatory ambiguity and the unpredictability of past enforcement actions in the crypto industry.
- The task force will establish clear boundaries for crypto regulation and improve registration processes for digital asset platforms, craft investor disclosure rules and combat fraud without stifling innovation and provide technical insights to Congress for updating statutory frameworks and coordinate with other federal, state, and international regulators.
- Public engagement is a priority, with stakeholders invited to submit feedback via Crypto@sec.gov. Roundtable discussions will also be held with investors, industry leaders, academics, and other participants.
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US SEC Proposes Novel Compensation Plan for Barclays Investors, Raising Legal and Policy Questions
On 22 January 2025, the US SEC published a Notice of Proposed Plan of Distribution and Opportunity for Comment concerning a Fair Fund created from a $200 million civil penalty imposed on Barclays PLC and Barclays Bank PLC. The proposed plan seeks to compensate investors who traded in Barclays American Depository Receipts (ADRs) on the New York Stock Exchange (NYSE) and ordinary shares on the London Stock Exchange (LSE) during the relevant period.
- The plan, created under the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act (SOX), is unique as it extends compensation to foreign investors trading on a foreign exchange (LSE).
- The $200 million penalty followed Barclays’ violations of US securities laws, with the Fair Fund established to compensate affected investors.
- The proposed plan introduces a unified claims process for investors trading on both the NYSE and LSE during the specified “Relevant Period.”
- Concerns have been raised about whether compensating foreign investors aligns with the US SEC’s mission to protect US investors and markets.
- Commissioner Peirce warned that distributing funds to foreign investors diverts resources from the US Treasury to entities outside the US without explicit congressional approval.
- The US SEC has invited public comments on the plan, particularly its alignment with SOX 308(a), its legal foundation, and its impact on the SEC’s regulatory mission.
- The feedback period allows investors, legal experts, and market participants to contribute views, which will inform the finalisation or revision of the plan.
- Commissioner Hester M. Peirce questioned the legal and policy justification for compensating foreign investors, citing statutory limits and Supreme Court precedents restricting the extraterritorial application of US law.
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Leadership Transitions at the US SEC: A Realignment Following Presidential Change
The US Securities and Exchange Commission (US SEC) announced leadership changes aligned with President Donald J. Trump’s administration, including the departure of senior officials and the appointment of Mark T. Uyeda as Acting Chairman.
- Amanda Fischer, Chief of Staff since January 2023, announced her departure on 17 January 2025. Fischer joined the US SEC in 2021, contributing to equity and Treasury market reforms and prioritising transparency and investor protection.
- Corey Klemmer, Policy Director since May 2024, resigned on 17 January 2025. Klemmer played a key role in developing the most comprehensive equity market reforms in nearly two decades, focusing on insider trading rules and corporate governance.
- Sanjay Wadhwa, Acting Director of the Division of Enforcement since October 2024, stepped down after 20+ years at the US SEC. Under his leadership, the Enforcement Division filed over 2,600 actions, securing $20 billion in disgorgements and penalties.
- Mark T. Uyeda was appointed Acting Chairman on 21 January 2025. A Commissioner since 2022, Uyeda brings nearly two decades of experience at the US SEC, with prior roles at the U.S. Treasury, Department of Labor, and as Chief Advisor to California’s securities regulator.
- Uyeda, originally from California, holds a business degree from Georgetown University and a law degree with honours from Duke University. His contributions to legal and financial policy earned him the 2023 Daniel K. Inouye Trailblazer Award.
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