FINRA: An Unnecessary, Unqualified Digital Asset Regulator

Published on by Cointele | Published on

Specifically, on July 9, FINRA published "Regulatory Notice 20-23," which encourages broker-dealers to notify their assigned FINRA risk monitoring analyst as to whether they, their affiliates or their associated persons conduct, or intend to conduct, digital asset activity, including non-securities activity.

From associated persons who buy and sell Bitcoin in their free time to affiliated non-FINRA members that engage in separately regulated non-securities digital asset activities, all are requested to report to FINRA. The request not only expands FINRA's regulatory reach beyond its securities mandate but beyond its expertise.

Secondly, the direct reporting to FINRA of the digital asset activity of a member's affiliate and associated persons exceeds the scope, intent and language of the relevant FINRA rules.

Given that Regulatory Notice 20-23 is essentially a reissuance of its prior digital assets reporting request, it indicates that FINRA shows no sign of abating its regulatory intrusion into the non-securities digital asset landscape and its attempts to expand its jurisdiction beyond its members.

The digital assets for which FINRA is requesting reporting are predominantly not securities and are beyond its mandate and purpose.

While there is still open debate as to whether some of the digital assets mentioned are securities, many such digital assets are not securities as a matter of settled law, and they are almost uniformly offered or transacted by entities outside of FINRA's regulatory purview.

Direct reporting of associated persons' digital asset trading is unduly burdensome FINRA is requesting that broker-dealers directly report digital asset activity related to their affiliates and associated persons.

Not only are most FINRA member affiliates not considered associated persons and therefore not subject to FINRA Rules 3210, 3270 and 3280, but these rules are related to the internal information-gathering policies of broker-dealers and do not impose upon them an obligation to separately and directly report such activity to FINRA. Furthermore, FINRA Rule 3210 only establishes an obligation for associated persons to obtain consent from a FINRA member before opening an account at an institution through which "Securities transactions" can be carried out - seemingly excluding the vast majority of digital asset institutions and related activity.

FINRA's request that broker-dealers now depart from long-standing practice and, in addition to their internal reporting policies, now directly report to FINRA their affiliates' and associated persons' digital asset activities is onerous, intrusive and beyond the scope of FINRA Rules 3210, 3270 and 3280.

Never-ending quasi-regulatory oversightSince first making the request in 2018, FINRA has in each successive year asked broker-dealers to report digital asset activity with no indication or threshold rationale for when to stop.