In its continued efforts to learn what broker-dealers and their employees are doing in the digital asset space, FINRA has effectively reissued a regulatory notice requesting that broker-dealers keep FINRA apprised of their digital asset activities.

 Last July, FINRA issued Regulatory Notice 18-20 where it requested that broker-dealers notify their regulatory coordinators about their and their registered representatives’ digital asset activities. Although not an exhaustive list, some activities FINRA wants information about include the following:

On July 8, the staffs of the Division of Trading and Markets (TM) of the US Securities and Exchange Commission and of the Office of General Counsel of the Financial Industry Regulatory Authority, Inc. issued a joint statement on broker-dealer custody of digital assets that are also securities (Joint Statement). As explained in, and for purposes of, the Joint Statement, a “digital asset” refers to an asset that is issued and transferred using distributed ledger or blockchain technology, including, but not limited to, so-called “virtual currencies,” “coins,” and “tokens.” While all digital assets are not securities under the federal securities laws, a digital asset that is a security is referred to as a “digital asset security” in the Joint Statement. While the Joint Statement provides some insight on the issues under consideration by regulators regarding custody, it does not identify specific circumstances under which a broker-dealer could custody digital asset securities in a manner consistent with the financial responsibility rule applicable to broker-dealers.

We are always looking to identify good forums for keeping abreast of global fintech developments and trends. One such interesting platform was Cross-Border Fintech: Regulation & the Law 2019, held in London on June 6, where we heard some great insights into the current market trends in and the future of fintech. The conference was well attended, with representatives of many industry leaders, authorities, and industry bodies in attendance. The participation of many on the front lines of fintech from financial institutions, fintech startups, and industry bodies created a forum to share innovative ideas and trends that allowed participants—including us—to keep up with the latest innovation.

Practitioners, academics, and entrepreneurs joined SEC regulators at the 2019 FinTech Forum hosted by the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub) on May 31 in Washington, DC. Panelists discussed a range of considerations on digital assets, including capital formation, trading and markets, investment management, and innovations in distributed ledger technology (DLT). In keeping with a positive trend that has emerged among the federal financial regulatory agencies, the forum demonstrated the SEC’s desire for industry engagement and the depth of its knowledge in the emerging technology.

The Financial Crimes Enforcement Network (FinCEN) recently issued guidance consolidating current FinCEN regulations, rulings, and guidance about cryptocurrencies and money services businesses (MSBs) under the Bank Secrecy Act (BSA). Along with the May 9 guidance, FinCEN issued an advisory to assist financial institutions in identifying and reporting suspicious activity or criminal use of cryptocurrencies.

The Financial Industry Regulatory Authority (FINRA) has once more filed a rule change with the US Securities and Exchange Commission (SEC) to further delay the effective date of certain changes to its maintenance margin rule for covered agency transactions (e.g., to-be-announced transactions, specified pool transactions, transactions in collateralized mortgage obligations) until March 25, 2020. Final implementation of the rule’s requirements to collect margin on covered agency transactions was scheduled for March 25, 2019, which itself was a delay from a previous compliance date of June 25, 2018. As with the other delays, the new postponement was filed for immediate effectiveness and FINRA, in delaying the rule changes, said that it “is considering, in consultation with industry participants and other regulators, potential amendments to the requirements of [amended Rule 4210].” FINRA further states that it “believes that this is appropriate in the interest of avoiding unnecessary disruption to the Covered Agency Transaction market. Of note, the risk limit determinations of amended Rule 4210 that became effective on December 15, 2016, are not affected by the proposal.” In considering further changes to the Rule 4210 margin collection requirements, FINRA appears to be reacting to industry concerns regarding the competitiveness of certain FINRA members in this market.

Two years ago, we wondered in our blog post whether the staff of the US Securities and Exchange Commission (SEC) would have to further extend no-action relief to permit a broker-dealer to rely on an SEC registered investment adviser (RIA) to perform the broker-dealer’s customer identification program (CIP) requirements. And . . . here we are.

On December 12, the SEC staff issued the latest in a series of letters to the Securities Industry and Financial Markets Association (SIFMA). The letters conditionally extend no-action relief to allow a broker-dealer to rely on RIAs to perform some or all of the broker-dealer’s CIP requirements as well as the broker-dealer’s obligations under beneficial ownership requirements that went into full effect in May 2018.

The staff of the Securities and Exchange Commission’s (SEC) Division of Trading and Markets (Staff) issued a no-action letter on October 29 to the Financial Industry Regulatory Authority (FINRA), which, in effect extends the effective date of recent changes to FOCUS reporting by registered broker-dealers. In August 2018, the SEC adopted amendments regarding, among other things, broker-dealer reporting with respect to reporting of extraordinary gains, the cumulative effect of changes in accounting principles, and comprehensive income reported on broker-dealer annual reports (i.e., Rule 17a-5). The amendments are scheduled to become effective for all filings made on and after November 5, 2018.

On October 11, 2018, the Securities and Exchange Commission (SEC) will have an open meeting to consider whether to reopen the comment period and request additional comments (including potential modifications to proposed rule language) regarding the following:

(1) Capital, margin, and segregation requirements for security-based swap (SBS) dealers and major SBS participants, and amendments to Rule 15c3-1 for broker-dealers that were proposed in October 2012 (Financial Responsibility Proposal)

(2) Amendments proposed in May 2013 that would establish the cross-border treatment of SBS capital, margin, and segregation requirements (Cross-Border Proposal)

(3) An amendment proposed in April 2014 that would establish an additional capital requirement for SBS dealers that do not have a prudential regulator (Prudential Regulator Proposal)

The UK Financial Conduct Authority (FCA) issued a press release on July 3 announcing the latest cohort of firms accepted into its regulatory sandbox. Twenty-nine firms were accepted, which represents the largest cohort to date. The sandbox, now in its fourth year, allows firms to test their products and services in a controlled environment, prior to use in the open market where they would be subject to the full suite of regulations and associated costs.

The United Kingdom is a leader worldwide in supporting growth and innovation in the world of financial technology. Similar efforts are occurring in the United States, but lag behind UK developments; as we reported just three months ago, Arizona became the first state in the United States to enact a law to create a “Fintech Sandbox.”

Focus of cohort

The focus of this year’s UK Fintech Sandbox cohort appears to be on the capital-raising process, with a large number of applicants seeking to increase the efficiency of the process and improve access to capital, including six firms seeking to automate the issuance of debt or equity. Other notable innovations among the UK cohort include the use of distributed ledger technology (over 40% of the cohort), firms offering automated or “robo” investment advice, and the continued increase of firms seeking to use technology to streamline the AML/KYC process.