The securities industry’s self-regulating organization offers annual advice to its members on how to stay out of trouble.
The Financial Industry Regulatory Authority (FINRA) has released its 2024 Annual Regulatory Oversight Report, which contains a section devoted to crypto assets for the first time.
FINRA is the United States self-regulatory organization that oversees securities broker-dealers, for whom membership is mandatory. It is under the regulation of the Securities and Exchange Commission (SEC). It described its oversight report as “one of the tools a member firm can use to help inform the development and operation of its compliance program.” Crypto Asset Developments and Advertised Volume were new among the 26 topics covered.
The crypto section was targeted to firms that currently engage in crypto-related activities or intend to do so. FINRA’s membership application program approves firms to serve as an agency in private (non-public) placements, operate an alternative trading system for crypto asset securities and provide custody services. The report stated:
“FINRA’s Membership Application Program (MAP) follows the SEC’s guidance in assessing a firm’s proposed crypto asset securities business line under applicable rules, such as the SEC’s financial responsibility rules and customer protection rule.”
The organization also asked that its members inform it when they engage in activities with non-security crypto assets, as well as associated persons’ crypto-related outside business activities, private securities transactions and crypto mining operations.
The report suggested a lengthy checklist of considerations for SEC compliance, determining whether a crypto asset is a security or if it is the subject of a registration statement, cybersecurity and Anti-Money Laundering. Retail communications were singled out because:
“Crypto asset-related retail communications reviewed by FINRA’s Advertising Regulation Department have had a non-compliance rate that is significantly higher than that of other products.”
There are separate checklists for “surveillance themes” and due diligence.
We’ve published the 2024 FINRA Annual Regulatory Oversight Report to share key insights and observations with member firms to use in strengthening their compliance programs.
— FINRA (@FINRA) January 9, 2024
FINRA could face consequences from a Supreme Court decision on the SEC’s use of in-house judges, expected this year. FINRA also uses in-house judges to decide cases involving members, and that practice was also challenged in 2023. The Court of Appeals for the District of Columbia Circuit ruled against FINRA in that challenge in July.