SEC and FINRA Probe DATs: What It Means and How To Respond

Key Takeaways

• It was recently reported that the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) began probing Digital Asset Treasury companies (DATs), raising a variety of compliance and governance issues, including:
  • Preferential treatment of certain investors
  • Use of material nonpublic information (MNPI)
  • Inadequate internal controls and anti-money laundering (AML) and know-your-customer (KYC) programs
  • Custody and governance deficiencies
• Even if framed as “voluntary,” regulator inquiries should not be ignored. Failing to respond usually leads to escalation, including into a subpoena, which is often broader, more costly and with tighter deadlines.
• Early engagement of experienced securities counsel is critical to manage risk, protect privilege and prepare for potential enforcement action.

Why This Matters

DATs are unique market participants in that the core business strategy is the development and management of a digital asset treasury, which generally creates a correlation between the digital asset and the company’s stock. These companies are also public, which means they are subject to the same rules as other listed companies:

• Fair Disclosure: Regulation FD (Reg FD) prevents public companies from sharing MNPI with certain individuals, like analysts and institutional investors, before it is made available to all investors. Anything shared with investors or market participants must also be made public. The goal is to ensure investors have access to the same information at the same time.
• Insider Trading: Insider trading is the buying or selling of a company’s securities by someone who has access to confidential information or MNPI about the company, generally in breach of a fiduciary duty or other relationship of trust and confidence. This is prohibited as a form of fraud. It gives an insider an unfair advantage over investors who do not have access to the same information.

What is MNPI? Information is “nonpublic” if it is not widely available to the general public. Typically, information becomes public when shared through official channels (e.g., press releases, public filings with regulators, announcements on national news services). Information is “material” when a reasonable investor would consider it significant enough to impact their investment decisions.

• Market Manipulation: Market manipulation is intentionally artificially affecting the supply or demand for a security to influence its price. Market manipulation is unlawful beyond the context of securities. It is also prohibited in commodities and currencies. That is, this prohibition applies to both the stock and the digital assets.
• Custody Requirements: The custody requirements differ depending on how the assets are classified under different regulatory regimes (e.g., securities, commodities, derivatives). Therefore, if the digital assets being held in the treasury are securities, the investment advisers must use a “qualified custodian” under the securities regime. For trading in spot digital assets that are deemed commodities, custody frameworks are determined by state custodian/trust laws, banking rules and money transmission requirements. For derivatives, which are regulated primarily by the Commodity Futures Trading Commission (CFTC) under the Commodity Exchange Act (CEA), custodians such as futures commission merchants or derivative clearing organizations must comply with the CFTC’s custodial rules.

Two SEC Divisions recently issued no-action letters on digital asset classification and acceptable digital asset custody. First, as to asset classification, on September 29, 2025, the SEC’s Division of Corporation Finance issued a no-action letter stating that it would not recommend enforcement action for treating programmatic transfers of 2Z tokens—payments automatically distributed to network providers and resource providers through smart contracts—as securities transactions. In short, the transactions are analogized to bitcoin mining rewards, as designed for consumptive use on the network, and earned through participants’ own installation and operation of the infrastructure, with payments determined algorithmically by their direct contributions, not by reliance on the managerial or entrepreneurial efforts of the Foundation or any promoter. Their token distributions are designed to facilitate the programmatic functioning of a decentralized physical infrastructure network.

Second, on September 30, 2025, the SEC’s Division of Investment Management issued a no-action letter stating that it would not recommend enforcement action under certain custody rules if a registered advisers or regulated funds hold crypto assets (and related cash and cash equivalents) with a State Trust Company, provided certain conditions are met. In sum, the no-action relief sets forth due diligence that must be conducted, specific requirements to be set forth in a written custodial agreement, disclosure and risk acknowledgement, and a determination that using the State Trust Company is in the best interests of the clients or shareholders.

• Fiduciary Duties: Corporations are creatures of state law, which provides specific requirements and guidelines for corporations, including fiduciary duty requirements. Fiduciary duties require individuals, such as corporate directors and officers, to act in the best interests of the company and its shareholders, primarily to maximize long-term shareholder value by acting with care, loyalty, and good faith. This generally includes acting with the skill and diligence expected of a reasonable person, avoiding conflicts of interest and not using company information for personal gain. While the digital asset held by a DAT’s treasury and a DAT’s stock are generally correlated, it is important to recognize they are not the same thing.
• Inadequate Internal Controls and AML/KYC Programs: The Sarbanes-Oxley Act requires public companies to implement adequate internal controls over financial reporting to validate that financial statements reflect their financial results accurately. Relatedly, AML and KYC programs that are required vary by the type of business and are generally risk-based. FINRA reviews brokers’ compliance with AML rules and actively investigates alleged AML/KYC deficiencies.
• Corporate Governance: Corporate governance is the system of rules, practices, and processes that direct, control, and generally govern a company. It is intended to balance the interests and responsibilities of a company’s management, board of directors, stockholders, and other stakeholders. State law generally governs the formation, structure, shareholder rights, and internal workings of a company. Federal law also applies and sets standards for public companies, particularly regarding securities, disclosure, and trading.

The “Voluntary” Request Misnomer

The SEC and FINRA often start with a “voluntary” request. But be aware that ignoring it often invites a subpoena, which is broader and more expensive and has tight deadlines. A nonresponse also tends to signal weak compliance culture, increasing scrutiny. On the other hand, timely cooperation can demonstrate good faith and may improve the outcome. But to cooperate does not mean to blindly comply. Cooperation often involves negotiation and proceeding with caution.

Why Competent Counsel Is Essential

It is generally best to engage competent counsel to interact with the government on your behalf. Experienced legal counsel are able to help DATs and others to:

• Negotiate and narrow regulator requests to reduce the company’s burden and cost.
• Comply with preservation duties. Failure to preserve evidence can have significant consequences. The duty to preserve evidence is triggered when a legal dispute is reasonably anticipated. This means preserving documents, cloud storage, communications, paper records, archived data and other relevant materials. This usually entails pausing normal destruction practices and implementing a “litigation hold” to prevent evidence from being destroyed, deleted, lost or altered. Failure to meet preservation obligations can result in sanctions or an adverse inference that the spoiled evidence would have been unfavorable to the person who failed to adequately preserve evidence.
• Work with the company to determine what, if any, relevant materials exist and how they can best be collected and provided to the government, if appropriate.
• Produce documents while maintaining all applicable privileges, ensuring that materials are not produced such that privilege is waived over those materials or, worse, over an entire subject area.
• Create a production strategy that best protects the confidentiality of the materials from subsequent disclosure.
• Assess substantive risk and help the company anticipate next steps, from additional investigative measures to possible enforcement.

Bottom Line

As the SEC and FINRA begin probing DATs related to certain trading practices, DATs must consider their obligations as public companies and how to respond if the regulators come knocking. A “voluntary” request from the SEC may be the start of a serious and lengthy process, and how it is handled at the outset can shape what follows, including whether the matter turns into a time-consuming and resource-intensive investigation or enforcement action. An experienced securities defense lawyer is best positioned to assist DATs in responding to a voluntary request by negotiating with the SEC, FINRA, or other government entity, protecting privilege and confidentiality, and assessing potential substantive risk.

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