FINRA recently announced targeted exams of its members focused on certain retail communications concerning “crypto asset” products and services between July 1, 2022 and September 30, 2022. For purposes of the exams, FINRA defines a “crypto asset” as one that is “issued or transferred using distributed ledger or blockchain technology, including, but not limited to, so-called ‘virtual currencies,’ ‘coins,’ and ‘tokens.’” The definition includes assets that are and are not securities under the federal securities laws, but excludes Securities Act-registered securities transferred through the system of a registered clearing agency—of which there are few if any at all.
FINRA is requesting from firms each communication pertaining to a crypto asset, as well as the date the communication was made public, whether the communication was filed with FINRA’s Advertising Regulation Department, whether the communication was approved by a registered principal, and an identification of each crypto asset, service, or transaction the communication concerns. FINRA is requesting firms’ WSPs concerning review, approval, record keeping, and dissemination of covered communications and any compliance policies, manuals, training materials, or other written guidance concerning crypto asset communications. FINRA also asked for any contracts or other agreements between the firm and any affiliate concerning the creation of covered communications and use of the firm’s customer information to determine who will receive communications.
It comes as no surprise that FINRA took this step. The events in the crypto market over the past weeks and months leave regulators little choice but to dig deeper and do more. Over the last seven years, aside from enforcement actions by the SEC and CFTC, there has been little regulatory action in the crypto asset space. Given a broker’s role as a so-called “gatekeeper,” it is not surprising FINRA would take action amid current market conditions.
Despite limited securities regulatory activity, FINRA asked its members beginning in July 2018 to voluntarily alert FINRA if the member engaged or intended to engage in any crypto activity. Since then, and as we recently wrote about, FINRA has made clear it views crypto asset business lines as material add-ons that likely require the firm to file a Continuing Membership Application under FINRA Rule 1017. FINRA has approved approximately two dozen firms for crypto asset placement agent and ATS business lines, and there are another roughly two dozen firms with pending applications (evenly split between New Membership Applications and Continuing Membership Applications).
FINRA will use the information and materials it receives via the exam responses to better understand its members’ communications with customers regarding crypto products. FINRA will also likely share the responses with SEC staff. Publishing the existence of the exam may also serve as a warning or deterrent (perhaps intentional, but at a minimum inadvertent) to any broker-dealers considering activity in the crypto space.
Nicholas J. LosurdoPartner
Jonathan H. HechtPartner