FINRA Request Disclosure on Digital Assets Activity

While we were off enjoying the 4th of July in the middle of the week, FINRA was issuing Regulatory Notice 18-20—Digital Assets. It is short and seemingly rather innocent. But read it closely. A few weeks ago some FINRA members were contacted by their Regulatory Coordinators and asked if they were doing anything with digital assets. It seemed innocent enough at the time. It turns out those calls were a survey that FINRA has now used as the basis for this Regulatory Notice.

Member Firms are told to let their Regulatory Coordinators know if they are going to be involved in any digital asset activity between now and July 31, 2019.

The list of activities is extensive and should be reviewed carefully. But the notice requests that you not only report if the Member Firm is going to engage in the activities but also affiliates and associated persons with a direct reference to Outside Business Activity and Private Transactions rules. Also the notice reminds Member Firms that a Rule 1017 (“CMA”) application, may be required if a material change to your business is involved.

So what does this mean? It appears that FINRA has decided to throw a wet towel on the development of digital asset business in its Member Firms. They are doing this by ordering firms to make disclosures far beyond the purview of FINRA’s authority. If you are under common control with a registered investment advisor that decides to form a digital asset fund, it appears FINRA expects you to make a disclosure to them even if the broker-dealer has no involvement in the formation or offering of the fund. The biggest issue of course is monitoring associated persons for outside business activities. The mining of cryptocurrencies is on the list of activities that requires disclosure but what if your associated persons decide to use digital assets to pay vendors for personal services? Even if your firm is not going to move into the digital asset space you need to provide guidance to your associated persons and what activities they may engage in with respect to digital assets.

It appears they have issued this notice knowing that many firms will simply put an outright ban on all digital asset activity at the firm, at affiliates if it has the authority and with its associated persons. It also means that compliance training and revised WSPs (written supervisory procedures) are in order to enforce this ban.

But what if you decide to move into this new product area? I recommend that you move carefully with a full review of all the cases that have been brought by the SEC and FINRA against persons and firms involved in this sector. Also make sure that you do extensive due diligence on the assets, particularly if you are going to offer the assets to retail clients. Also add WSPs dealing with digital assets. Finally, provide training for all staff involved with the activities associated with digital assets.


© July 2018 Sharon M. Davison. Use permitted with attribution.

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