Every year FINRA issues a new regulatory notice regarding the reporting of activities involving digital assets and every year we see FINRA-regulated entities run afoul of those reporting requirements. Why? Because the FINRA reporting requirements are much broader than most people within the brokerage and exchange community realize and much broader than is practically necessary. However, all FINRA-regulated entities and persons should be aware of these requirements.
Who is Covered by the FINRA Reporting Requirements?
The reporting requirements request that member firms inform their risk-monitoring analyst if the firm, associated persons, or affiliates are engaged in activities involving digital assets, including cryptocurrencies, virtual coins, tokens, and presumably the now popular asset class of non-fungible tokens (NFTs).
While it is certainly understandable that a risk-monitoring analyst should be informed of any risky bets a FINRA-regulated firm may be placed in digital assets, the trickier part for FINRA-regulated entities is that the reporting requirements also extend to the digital holdings of associated persons. In other words, under the terms of the Regulatory Notice, firms should be reporting the digital assets of all their FINRA-licensed employees. This is an incredibly onerous imposition on firms, requiring them to keep track of employees’ investment choices. But as of now, that is the state of the law.
What activities need to be reported?
Regulatory Notice 21-25, the current operative FINRA notice, requires firms to report:
- Purchasing or selling of digital assets
- Purchasing or selling pooled funds that are invested in digital assets
- Creating or providing management or advisory services for pooled funds invested in digital assets
- Purchasing derivatives tied to digital assets
- Participating in initial or secondary offerings of digital assets
- Accepting cryptocurrencies from customers
- Mining cryptocurrencies
- Providing clearance and settlement service for cryptocurrencies
- Using blockchain or other distributed ledger technologies (DLT) for recording cryptocurrency transactions
A Vast Expansion of FINRA Reporting Requirements
This is a wide-ranging set of transactions for firms to report and represents a vast expansion of FINRA reporting requirements. While FINRA-associated persons have long been required to report internally their accounts at institutions that engage in securities transactions, this Regulatory Notice requires reporting a whole host of transactions directly to FINRA including activities like cryptocurrency mining, which appear wholly unrelated to FINRA’s regulatory mission.
Nonetheless, Regulatory Notice 21-25, like the notices that have preceded it, says what it says, and firms should comply. Firms, therefore, need proactive procedures for collecting the required information from their FINRA-associated employees.
The attorneys at Dressel/Malikschmitt LLP are ready to assist FINRA-regulated firms with these new reporting requirements. If you would like to contact one of our attorneys, please contact us via email at firstname.lastname@example.org, call at 848.202.9323, or visit our website www.d-mlaw.com.
Please note that any legal question requires consideration of individual facts, and this article is not intended as legal advice to any individual or business and should not be relied upon as such.