FINRA to review firms’ activities related to digital assets
Coordinating with the SEC, FINRA will consider how firms determine whether a particular digital asset is a security.
The United States Financial Industry Regulatory Authority (FINRA) has just published its 2019 Annual Risk Monitoring and Examination Priorities Letter, including digital assets among the areas of emphasis for its risk monitoring and examination programs in the coming year.
FINRA notes that some firms have shown significant interest in participating in activities related to digital assets. This year, FINRA will review firms’ activities through its membership and examination processes related to digital assets and assess firms’ compliance with applicable securities laws and regulations and related supervisory, compliance and operational controls to mitigate the risks associated with such activities.
In particular, in coordination with the U.S. Securities and Exchange Commission (SEC), FINRA will consider how firms determine whether a particular digital asset is a security and whether firms have implemented adequate controls and supervision over compliance with rules related to the marketing, sale, execution, control, clearance, recordkeeping and valuation of digital assets, as well as AML/Bank Secrecy Act rules and regulations.
In its Regulatory Notice 18-20, FINRA states that it is monitoring developments in the digital asset marketplace and is undertaking efforts to ascertain the extent of FINRA member involvement related to digital assets. The regulator advises firms to promptly notify FINRA if they, or their associated persons or affiliates, currently engage, or intend to engage, in any activities related to digital assets, such as cryptocurrencies and other virtual coins and tokens.
Until July 31, 2019, FINRA encourages each firm to keep its Regulatory Coordinator abreast of changes in the event the firm, or its associated persons or affiliates, determines to engage in activities relating to digital assets not previously disclosed.
Let’s recall that the Office of Compliance Inspections and Examinations (OCIE) of the SEC has also included digital assets among its 2019 examination priorities. Due to the significant growth and risks presented in the digital asset market, OCIE will continue to monitor the offer and sale, trading, and management of digital assets, and where the products are securities, examine for regulatory compliance. More specifically, through high level inquiries, OCIE will take steps to identify market participants offering, selling, trading, and managing these products or considering or actively seeking to offer these products and then assess the extent of their activities.
For firms actively engaged in the digital asset market, OCIE will conduct examinations focused on, among other things, portfolio management of digital assets, trading, safety of client funds and assets, pricing of client portfolios, compliance, and internal controls.