FINRA Wants to Know About Brokerage Digital Asset Activity

With an eye towards determining the extent of member involvement related to digital assets, the self-regulatory authority is requesting disclosures related to broker-dealer participation in the marketplace.

Regulatory Notice 18-20 requests that brokerage firms “promptly notify” their regulatory coordinator in writing if it, its associated persons or its affiliates engage or intend to engage in any activities related to digital assets — including non-securities.

“The market for digital assets, such as cryptocurrencies and other virtual coins and tokens, has grown significantly and has increasingly been of interest to retail investors,” the organization states in the notice. “At the same time, investor protection concerns exist, including incidences of fraud and other securities law violations involving digital assets and the platforms on which they trade.”

The types of activities of interest to FINRA include:

  • purchases, sales or executions of transactions in digital assets or pooled fund investing in digital assets;
  • creation, management or provision of advisory services for a pooled fund related to digital assets;
  • purchases, sales or executions of transactions in derivatives (g., futures, options) tied to digital assets;
  • participation in an initial or secondary offering of digital assets (g., ICO, pre-ICO);
  • creation or management of a platform for the secondary trading of digital assets; and
  • custody or similar arrangement of digital assets.

The notice further explains that a material change in a firm’s business operations would require the submission and approval of a continuing membership application (CMA) regarding its involvement in activities related to digital assets.

Unless a change has occurred, FINRA does not request additional notice if a firm already has submitted a CMA regarding its involvement in digital asset activities or provided notification to its regulatory coordinator in response to a direct request or by way of the 2018 RCA Survey.

Each firm is encouraged to keep its regulatory coordinator updated until July 31, 2019, regarding any new type of digital asset activity not previously disclosed.

Meanwhile, it would seem that skepticism surrounding the long-term investment merits of cryptocurrencies remains. Earlier this year, the SEC’s Office of Compliance Inspections and Examinations (OCIE) announced that its examination priorities will include monitoring the growth of cryptocurrencies and initial coin offerings and examining registrants involved in their offer and sale to ensure that investors receive adequate disclosures about their associated risks.

In addition, a recent Context Allocator Trends Report based on responses from more than 400 institutional investors and family offices finds that just 11% are looking to add cryptocurrencies to their investment portfolios, while 71% of allocators have no plans to invest in crypto-related funds and 18% are still undecided.

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