The SEC approved eleven spot Bitcoin ETFs on January 10, 2024. As a result, investment advisers may be curious about whether or how to integrate Bitcoin ETFs into client portfolios. This blog is intended to provide an update on the regulatory landscape and inform advisers how to fulfill their compliance obligations if they determine these assets should be integrated into client portfolios.
Please Note: This blog is not, and does not serve as, an endorsement of Bitcoin, or any other cryptocurrency. Advisers must separately educate their investment professionals and clients about cryptocurrencies prior to integrating crypto into client portfolios or assisting with a client directed purchase.
Summary
Bitcoin is considered to be speculative. The SEC has been aggressively reviewing cryptocurrency investments during examinations. Depending upon the scope of an adviser’s assistance with/use of Bitcoin or cryptocurrencies (employing same as a courtesy/client directed accommodation vs. utilizing same as an asset class in client portfolios) both applicable clear and conspicuous ADV disclosure, and a separate Acknowledgment executed by the client, are strongly encouraged. We continue to assist our clients with such disclosures/acknowledgements.
Spot Bitcoin ETF Approval
On January 10, 2024, the SEC approved eleven spot Bitcoin ETFs. The ETFs, from financial behemoths like BlackRock, Fidelity, WisdomTree, and Invesco, began trading on January 11, 2024. With approval of a spot Bitcoin ETF, investment advisers should be prepared to consider a spot Bitcoin ETF to client portfolios. However, doing so comes with compliance implications, and it is critical for advisers to conduct robust due diligence to ensure such integration is reasonable and suitable for clients.
Compliance Program
Investment advisers registered at the federal and state level are required to maintain a robust compliance program. Advisers who want to integrate a spot Bitcoin ETF should update their policies and procedures manual to address the unique risks and challenges that these assets present, including:
Suitability – prior to purchasing a spot Bitcoin ETF for clients, advisers should ensure that these assets are suitable for the client. Bitcoin is historically (and notoriously) volatile, and advisers should assess whether an investment in Bitcoin aligns with a client’s suitability, long-term objectives, and risk tolerance.
Disclosures and Acknowledgements – advisers should provide clients with an acknowledgement form wherein the client acknowledges the risks associated with purchasing a spot Bitcoin ETF and that the asset class is currently considered speculative. Additionally, advisers may update Form ADV Part 2A to include language which similarly describes the risks associated with Bitcoin and how the adviser integrates it into a client’s portfolio (i.e., on a discretionary basis or at specific client direction). Stark & Stark remains available to assist with preparing the acknowledgement and, when necessary, appropriate ADV disclosure language.
Fiduciary Duty
Registered investment advisers are fiduciaries and are required to act in the best interests of their clients. With this power comes the responsibility to:
- Conduct thorough due diligence, including understanding Bitcoin’s market dynamics, its correlation with other assets, and the technology behind it, and appropriately educate firm employees on these market dynamics; and
- Educate clients and ensure clients understand the risks and potential rewards of investing in Bitcoin.
Transparency About Fees
Purchasing a Bitcoin ETF may come with fees. For example, as of writing, spot Bitcoin ETFs have fees ranging from 0% to 1.50% based on various factors. If an adviser charges fees associated with the acquisition, management, or disposition of a Bitcoin ETF, it is crucial to be transparent. Advisers should clearly disclose any associated fees in their investment advisory agreement and ensure such fees are reasonable in light of the services provided.
Conclusion
The SEC’s approval of a spot Bitcoin ETF is a testament to Bitcoin’s growing legitimacy as an asset (however, as indicated above, this blog is not, and should not be construed in any manner whatsoever as, an endorsement of Bitcoin or any other cryptocurrency investment). As Bitcoin’s institutional legitimacy grows, integrating Bitcoin exchange traded products into client portfolios can put advisers at the forefront of the new financial revolution. However, integrating Bitcoin into client portfolios comes with compliance obligations. By adhering to a robust compliance framework, keeping abreast of regulatory changes, and educating themselves and clients on the benefits of Bitcoin, advisers can harness the potential of Bitcoin while fulfilling their fiduciary and compliance obligations.
If you have any questions or would like more information, please reach out to our Investment Management & Securities team.
