Scarinci Hollenbeck, LLC, LLCScarinci Hollenbeck, LLC, LLC

Firm Insights

FINRA Wants to Know If Broker-Dealers Are Involved in Digital Assets

Author: Scarinci Hollenbeck, LLC

Date: July 29, 2020

Key Contacts

Back

The Financial Industry Regulatory Authority (FINRA) is ‘encouraging’ broker-dealers to keep it informed about their activities involving digital assets…

FINRA Wants to Know If Broker-Dealers Are Involved in Digital Assets

The Financial Industry Regulatory Authority (FINRA) is ‘encouraging’ broker-dealers to keep it informed about their activities involving digital assets. Under Notice 20-23, FINRA is requesting that broker-dealers keep their Risk Monitoring Analyst informed if the firm, or its associated persons or affiliates, currently engages, or intends to engage, in any activities related to digital assets.

“As the area of digital assets continues to evolve and present unique regulatory challenges, FINRA believes it is important to keep the lines of communication with [dealers] open,” FINRA said in the Notice.

FINRA Oversight of Digital Assets

Although FINRA has not established specific rules governing the emerging industry, its latest Notice confirms that it plans to keep a close eye on firms’ digital asset activities, even those that may not be considered “securities.” Digital assets that fall under the definition of an “investment contract” under Section 2(a)(1) of the Securities Act of 1933 or under Section 3(a)(10) of the Securities Exchange Act of 1934 are considered  “securities” and governed by the federal securities laws and FINRA rules.

Last summer, FINRA and the SEC staff issued a Joint Statement regarding broker-dealer custody of digital assets. The Joint Statement emphasized that “digital asset securities and related innovative technologies raise novel and complex regulatory and compliance questions and challenges.” It went on to discuss several concerns that are unique to digital assets, including compliance with the custodial requirements under Rule 15c3-3 under the Exchange Act, which is known as the Customer Protection Rule.

In its Risk Monitoring and Examination Priorities Letter for 2020, FINRA identified digital assets as an examination priority, citing that they raise novel and complex regulatory issues under federal securities laws and FINRA rules. FINRA also noted that receiving an increasing number of New Member Applications (NMAs) and Continuing Member Applications (CMAs) from firms seeking to engage in business activities related to digital assets. As set forth in FINRA 2020 Priorities Letter, it may take the following factors, among others, into consideration when reviewing a firm’s digital asset activities:

  • If your firm is considering engaging in digital asset activities, has it filed a CMA with FINRA?
  • Does your firm provide a fair and balanced presentation in marketing materials and retail communications, including addressing risks presented by digital asset investments, and not misrepresenting the extent to which digital assets are regulated by FINRA or the federal securities laws or eligible for protections thereunder (such as Securities Investor Protection Corporation coverage)?
  • Do your firm’s communications misleadingly imply that digital asset services offered through an affiliated entity are offered through and under the supervision, clearance, and custody of a registered broker-dealer?
  • If your firm is engaging in digital asset transactions, what controls and procedures has it established to support facilitation of such transactions, including initial issuance or secondary market trading of digital assets?

FINRA’s Latest Digital Asset Guidance

FINRA issued its latest guidance on July 18, 2020. For purposes of the Notice, the term “digital asset” refers to cryptocurrencies and other virtual coins and tokens (including virtual coins and tokens offered in an initial coin offering (ICO) or pre-ICO), and any other asset that consists of, or is represented by, records in a blockchain or distributed ledger (including any securities, commodities, software, contracts, accounts, rights, intangible property, personal property, real estate or other assets that are “tokenized,” “virtualized” or otherwise represented by records in a blockchain or distributed ledger).  

As set forth in the Notice, the types of activities of interest to FINRA if undertaken (or planned) by a member, its associated persons or affiliates, is extensive and includes, but are not limited to:

  • purchases, sales or executions of transactions in digital assets;
  • purchases, sales or executions of transactions in a pooled fund investing in digital assets;
  • creation of, management of, or provision of advisory services for, a pooled fund related to digital assets;
  • purchases, sales or executions of transactions in derivatives (e.g., futures, options) tied to digital assets;
  • participation in an initial or secondary offering of digital assets (e.g., ICO, pre-ICO);
  • creation or management of a platform for the secondary trading of digital assets;
  • custody or similar arrangement of digital assets;
  • acceptance of cryptocurrencies (e.g., bitcoin) from customers;
  • mining of cryptocurrencies;
  • recommend, solicit or accept orders in cryptocurrencies and other virtual coins and tokens;
  • display indications of interest or quotations in cryptocurrencies and other virtual coins and tokens;
  • provide or facilitate clearance and settlement services for cryptocurrencies and other virtual coins and tokens; or
  • recording cryptocurrencies and other virtual coins and tokens using distributed ledger technology or any other use of blockchain technology.

What Could be Required in the Future?

FINRA’s “request” will be effective until July 31, 2021. However, assuming the digital assets industry continues to evolve, and given the ‘warnings’ in the Notice and Joint Statement, firms should expect regulators to continue to keep a watchful eye on their involvement with this category of investment for the foreseeable future.

If you have questions, please contact us

If you have any questions or if you would like to discuss these issues further,
please contact Paul Lieberman or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.

No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.

Scarinci Hollenbeck, LLC, LLC

Related Posts

See all
How Understanding Bankruptcy Trends Can Benefit Your Business post image

How Understanding Bankruptcy Trends Can Benefit Your Business

The bankruptcy legal landscape presents both challenges and opportunities for businesses navigating financial distress. Understanding current bankruptcy trends can help businesses make more informed and strategic decisions. Corporate Bankruptcy Filings Trending Upwards Bankruptcy filings continued to trend upwards in 2024. According to statistics released by the Administrative Office of the U.S. Courts, personal and business […]

Author: Brian D. Spector

Link to post with title - "How Understanding Bankruptcy Trends Can Benefit Your Business"
SEC Takes Actions Against Issuers for Failure to File Form D post image

SEC Takes Actions Against Issuers for Failure to File Form D

In December, the U.S. Securities and Exchange Commission (SEC) announced charges against two privately held companies for failing to file a Form D notice, which is generally utilized for exempt securities offerings. Here, the SEC’s enforcement sends a strong message: compliance with regulatory requirements is not optional and failure to comply can have significant consequences. […]

Author: Kenneth C. Oh

Link to post with title - "SEC Takes Actions Against Issuers for Failure to File Form D"
Redefining Labor Relations: NLRB's Pivot from Abruzzo’s Memoranda post image

Redefining Labor Relations: NLRB's Pivot from Abruzzo’s Memoranda

On February 14, 2025, the Office of General Counsel (OGC) of the National Labor Relations Board (NLRB) under Acting General Counsel William B. Cowen issued Memorandum 25-05, “New Process for More Efficient, Effective, Accessible and Transparent Case handling.” The Memorandum rescinds nearly all of the Memoranda issued by his direct predecessor, Jennifer Abruzzo, setting the […]

Author: Matthew F. Mimnaugh

Link to post with title - "Redefining Labor Relations: NLRB's Pivot from Abruzzo’s Memoranda"
What Are FIRPTA Withholding Requirements? post image

What Are FIRPTA Withholding Requirements?

If you purchase real property from a foreign person or entity, you may be required to withhold taxes from your payment to the seller under the Foreign Investment in Real Property Tax Act (FIRPTA). The federal tax law is designed to ensure that foreign sellers pay any applicable capital gains tax on profits realized from […]

Author: Jesse M. Dimitro

Link to post with title - "What Are FIRPTA Withholding Requirements?"
Does Your Homeowners Insurance Provide Adequate Coverage? post image

Does Your Homeowners Insurance Provide Adequate Coverage?

Your home is likely your greatest asset, which is why it is so important to adequately protect it. Homeowners insurance protects you from the financial costs of unforeseen losses, such as theft, fire, and natural disasters, by helping you rebuild and replace possessions that were lost While the definition of “adequate” coverage depends upon a […]

Author: Jesse M. Dimitro

Link to post with title - "Does Your Homeowners Insurance Provide Adequate Coverage?"
Understanding the Importance of a Non-Contingent Offer post image

Understanding the Importance of a Non-Contingent Offer

Making a non-contingent offer can dramatically increase your chances of securing a real estate transaction, particularly in competitive markets like New York City. However, buyers should understand that waiving contingencies, including those related to financing, or appraisals, also comes with significant risks. Determining your best strategy requires careful analysis of the property, the market, and […]

Author: Jesse M. Dimitro

Link to post with title - "Understanding the Importance of a Non-Contingent Offer"

No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.

Sign up to get the latest from our attorneys!

Explore What Matters Most to You.

Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.

Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.

Let`s get in touch!

* The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.

Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!

Please select a category(s) below: