The Financial Industry Regulatory Authority (FINRA), the self-regulatory organization overseeing U.S. securities broker-dealers, has taken a significant step forward in addressing the evolving world of cryptocurrency.
For the first time, its 2024 Annual Regulatory Oversight Report includes a dedicated section on crypto assets. The inclusion reflects the growing importance of crypto assets in the financial landscape and FINRA’s commitment to guiding its members through the new terrain.
Guidance for firms engaging in crypto-related activities
FINRA, operating under the regulation of the Securities and Exchange Commission (SEC), plays a pivotal role in ensuring that member firms adhere to compliance standards. The newly added crypto section targets firms actively involved in crypto-related activities or planning to engage in such activities. The move comes as part of FINRA’s effort to assist firms in developing and operating their compliance programs effectively. The inclusion of topics such as Crypto Asset Developments and Advertised Volume in the report marks an acknowledgment of the nuanced challenges these assets present.
FINRA’s Membership Application Program (MAP) aligns closely with the SEC’s guidelines, focusing on evaluating member firms’ business plans in the realm of crypto asset securities. The crucial assessment by FINRA encompasses key areas such as financial responsibility and adherence to customer protection rules. The meticulous approach ensures that firms engaging in the burgeoning field of crypto assets maintain high standards of integrity and responsibility.
In addition to the assessment of crypto asset securities, FINRA also mandates its member firms to disclose their involvements with non-security crypto assets. The requirement extends to providing detailed information about associated persons’ activities related to crypto, including any outside business ventures, private securities transactions, and even crypto mining operations. The comprehensive reporting is part of FINRA’s effort to maintain a transparent and compliant environment within the rapidly evolving cryptocurrency sector.
Emphasis on cybersecurity and anti-money laundering
The report outlines a comprehensive checklist for member firms to ensure compliance with SEC regulations. It includes determining whether a crypto asset qualifies as a security, the applicability of registration statements, and adhering to stringent cybersecurity and Anti-Money Laundering protocols. Retail communications involving crypto assets have also been highlighted due to a significantly higher rate of non-compliance compared to other products, as noted by FINRA’s Advertising Regulation Department.
FINRA’s approach and regulatory mechanisms may face changes following a pending Supreme Court decision regarding the SEC’s use of in-house judges. The decision could have implications for FINRA, which also relies on in-house judges for adjudicating cases involving its members. The practice faced legal challenges in 2023, with the Court of Appeals for the District of Columbia Circuit ruling against FINRA in July.
Conclusion
FINRA’s inclusion of a crypto assets section in its annual report is a clear indication of the organization’s responsiveness to the dynamic nature of financial markets. By providing detailed guidance and setting compliance standards, FINRA is equipping its members to navigate the complex and rapidly evolving crypto sector. The proactive approach is essential for maintaining market integrity and protecting investor interests in the face of new financial technologies and trends.
