FINRA Issues Update on Crypto Asset Activities and Potential Rule Violations
August 31, 2024
The Case
FINRA has issued an update detailing its ongoing efforts to monitor and regulate crypto asset-related activities among its member firms.
Crypto assets, which include virtual currencies, tokens, and coins, present unique regulatory challenges under federal securities laws and FINRA rules. Through its regulatory programs, FINRA has identified several potential rule violations associated with these activities, underscoring the need for heightened supervision and compliance measures.
The update highlights several key areas of concern:
Misrepresentation of Regulatory Obligations: Some firms misrepresented the applicability of federal securities laws and FINRA rules to crypto asset-related activities, violating FINRA Rule 2210.
Inadequate Due Diligence and Supervision: Failures to conduct reasonable due diligence on crypto asset private placements and a lack of effective supervision have led to violations of FINRA Rule 3110.
Disclosure Failures: Firms failed to adequately disclose crypto asset outside business activities (OBAs) and properly supervise private securities transactions (PSTs), violating FINRA Rules 3270, 3280, and 3110.
Anti-Money Laundering (AML) Deficiencies: Failures to establish AML programs designed to detect and report suspicious crypto asset transactions, violating FINRA Rule 3310.
Recordkeeping Failures: Associated persons failed to provide required records related to crypto asset OBAs and PSTs, violating FINRA Rule 8210.
Material Misstatements and Omissions: Firms negligently disseminated promotional materials with material misstatements or omissions regarding crypto asset businesses, leading to violations of FINRA Rule 2010.
Regulatory Implications
The growing involvement of FINRA member firms in crypto asset activities presents heightened regulatory risks. More than a third of member firms engaged in crypto activities are involved in retail brokerage, while others are active in capital markets, trading, and crypto asset custody.
The update reflects FINRA’s intensified scrutiny of these activities and highlights the increasing risk of market manipulation schemes, such as pump-and-dump operations involving crypto assets and securities.
This regulatory update demonstrates FINRA’s commitment to ensuring that firms align their crypto asset activities with existing federal securities laws and FINRA rules while also addressing the unique risks that crypto assets pose. Firms involved in the crypto asset market should expect FINRA’s continued scrutiny and be prepared for evolving regulatory requirements.
Practical Guidance for Firms
To mitigate risks and avoid potential enforcement actions, FINRA member firms engaged in crypto asset activities should take the following steps:
Enhance Supervision and Due Diligence: Firms must improve their supervision and due diligence processes related to crypto asset activities, especially when engaging in private placements or offering new crypto asset products.
Strengthen AML Programs: AML programs should be designed to detect suspicious transactions in crypto assets and include appropriate reporting mechanisms.
Monitor Outside Business Activities: Review and update procedures related to disclosing, approving, and supervising OBAs and PSTs involving crypto assets to ensure compliance with FINRA rules.
Communicate Accurately: Review all promotional materials to avoid misstatements or omissions and accurately represent the nature of the firm’s crypto asset-related business in all communications.
InnReg offers comprehensive compliance consulting services to help firms stay ahead of regulatory developments in the crypto asset space.
Our solutions include reviewing and enhancing compliance frameworks, AML programs, and supervisory systems.
The Securities and Exchange Commission (SEC) recently penalized a broker-dealer for failing to file Suspicious Activity Reports (SARs) as required under the Bank Secrecy Act.
FINRA recently fined two broker-dealers for failing to adequately supervise and monitor trading activities to detect and prevent potentially manipulative practices.
The Federal Trade Commission (FTC) has issued a final rule prohibiting businesses from creating, purchasing, or disseminating fake reviews and testimonials.
