The Financial Industry Regulatory Authority (FINRA) has released its 2024 Annual Regulatory Oversight Report, which includes a section dedicated to crypto assets for the first time. FINRA is a self-regulatory organization in the United States that oversees securities broker-dealers, with mandatory membership for these firms. It operates under the regulation of the Securities and Exchange Commission (SEC). The report is described as a tool for member firms to inform the development and operation of their compliance programs. Among the 26 topics covered in the report, new sections have been added, including one on crypto assets and advertised volume.
The crypto-focused section is aimed at firms currently involved in crypto-related activities or those intending to enter this space. FINRA’s Membership Application Program (MAP) evaluates firms seeking approval to engage in various crypto-related activities, such as operating an alternative trading system for crypto asset securities, providing custody services, or participating in private (non-public) placements. The report noted that FINRA follows SEC guidance when assessing a firm’s proposed crypto asset securities business under applicable rules, including financial responsibility rules and customer protection rules.
FINRA also requested that its member firms inform the organization when engaging in activities related to non-security crypto assets and disclose any associated persons’ crypto-related outside business activities, private securities transactions, or crypto mining operations. The report presented a comprehensive checklist of considerations for SEC compliance, covering topics such as determining whether a crypto asset is a security, cybersecurity measures, Anti-Money Laundering (AML) procedures, and retail communications. Retail communications, in particular, were highlighted due to a higher non-compliance rate compared to other products:
“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.”
The report also outlined separate checklists for “surveillance themes” and due diligence.
It’s worth noting that FINRA could potentially face consequences based on a Supreme Court decision regarding the SEC’s use of in-house judges, expected later this year. This decision could have implications for how FINRA handles cases involving its members, as it also employs in-house judges for such matters. In 2023, a challenge was raised against FINRA’s use of in-house judges, and while the Court of Appeals for the District of Columbia Circuit ruled against FINRA in that challenge, the situation continues to evolve.
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