On January 22, the Financial Industry Regulatory Authority (“FINRA”) released its 2019 Risk Monitoring and Examination Priorities Letter (the “Letter”). The Letter highlights material new priorities for FINRA examinations in the coming year, as well as priorities in areas of ongoing concern. The topics highlighted in this year’s Letter reflect FINRA’s increasing focus on its members’ interaction with, and adoption of, innovative financial technologies, as well as its implicit acknowledgement of the ability for such innovations to assist in regulatory compliance. The new priorities highlighted in the Letter include several related to FinTech, including online distribution platforms, use of regulatory technology (or “RegTech”), and supervision of digital asset businesses. In priority areas of ongoing concern, the Letter confirmed that FINRA will continue to focus on reviewing the adequacy of firms’ cybersecurity programs. Below we detail FINRA’s discussion of these priorities and analyze them in the context of other recent guidance and enforcement actions. Continue Reading FINRA 2019 Examination Priorities Letter Includes Focus on FinTech and Cybersecurity
On November 16, 2018, the U.S. Securities and Exchange Commission (“SEC”) Division of Corporation Finance (“Corp. Fin.”), Division of Investment Management, and Division of Trading and Markets issued a joint public statement on “Digital Asset Securities Issuance and Trading.” The public statement is the latest in the Divisions’—and the Commission’s—steady efforts to publicly outline and develop its analysis on the application of the federal securities laws to initial coin offerings (“ICOs”) and certain digital tokens. These efforts have combined a series of enforcement proceedings with public statements by Chairman Jay Clayton and staff, including a more detailed statement of the SEC’s analytical approach in Corp. Fin. Director William Hinman’s speech on digital assets in June 2018. Continue Reading SEC Divisions Issue Public Statement on Digital Assets and ICOs, Echoing Recent Enforcement Actions
On September 11, the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”) each separately initiated their first enforcement action for violations of broker-dealer regulatory requirements under U.S. securities laws in digital asset markets. These actions echo all prior agency actions and alerts indicating that where a “security” is involved, both agencies will expect digital asset market participants to fully comply with U.S. securities laws. Additionally, they serve as a serious reminder to all persons acting as “brokers” or “dealers” (together, “broker-dealers”) that just because digital asset securities are unconventional securities with unconventional compliance challenges does not mean that either the SEC or FINRA will lower its compliance expectations. Continue Reading The SEC and FINRA Bring the First Enforcement Actions Against Broker-Dealers for Violations in Digital Asset Markets, Providing Reminder of Compliance Obligations
Artificial intelligence and machine learning (for simplicity, we refer to these concepts together as “AI”) have been hot topics in the financial services industry in recent years as the industry wrestles with how to harness technological innovations. In its report on Nonbank Financials, Fintech, and Innovation released on July 31st, the Treasury Department (“Treasury”) generally embraced AI and recommended facilitating the further development and incorporation of such technologies into the financial services industry to realize the potential the technologies can provide for financial services and the broader economy.
On July 31st, the Treasury Department (“Treasury”) released its fourth and final report in response to President Trump’s Executive Order 13772. The report, entitled “A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation” (the “Report”), only briefly addresses distributed ledger technologies, blockchain and digital assets, but takes broad aim at perceived regulatory challenges to innovation. The Report argues for a significant rethinking of state and federal regulation across data access, licensing, payments and many other issues. Continue Reading Treasury Report Recommends More Consistent Regulation to Spur Innovation
Today, Treasury released its long-awaited FinTech report entitled “A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation”. While the report provided only a very truncated discussion of distributed ledger technologies, blockchain, and digital assets, it discussed at length other key innovation and technology issues that are impacting the market for financial services. While DLT and digital assets appropriately garner many headlines, the innovative potential of new technologies for how financial services are accessed, delivered, bundled, analyzed, marketed, and regulated offers great opportunities as well as risks. The focus of the Treasury FinTech report on these fundamental issues no doubt will spur even more examination of our changing financial environment. Continue Reading Treasury Releases FinTech Report, and OCC Immediately Relaunches a National FinTech Charter
On March 27, 2018, Massachusetts Secretary of State William Galvin announced that the state had ordered five firms to halt initial coin offerings (“ICOs”) on the grounds that the ICOs constituted unregistered offerings of securities but made no allegations of fraud. These orders follow a growing line of state enforcement actions aimed at ICOs.
This was not Massachusetts’s first foray into regulating ICOs. On January 17, 2018 the state filed a complaint alleging violations of securities and broker-dealer registration requirements against the company Caviar and its founder for an ICO that sought to create a “pooled investment fund with hedged exposure to crypto-assets and real estate debt.”
Part 3: Developments in the United States and the Rising Tide of Enforcement
In 2017, the use of initial coin offerings (“ICOs”) as an alternative means to raise capital took off worldwide. By the end of the year, ICO sponsors raised over $5.6 billion globally through token offerings. At the same time, U.S. regulators’ focus on ICOs has rapidly expanded as well. Since releasing the DAO Investigative Report in July 2017 (the “DAO Report”), the U.S. Securities and Exchange Commission (the “SEC”) has steadily increased its focus on ICO activity. As exemplified by numerous investor advisories, the creation of the Cyber Unit within the Enforcement Division with the purpose to halt and deter cyber-related misconduct in the securities markets, enforcement actions against ICOs, and the Office of Compliance Inspection and Examinations’ (“OCIE”) announcement that monitoring ICO sales will be one of its top 2018 priorities, it is clear that the SEC views ICOs as squarely within the scope of its mandate for regulation and enforcement. Unsurprisingly, state enforcement actions and private class action litigation targeting ICOs are also on the rise. Continue Reading Around the World in ICOs: ICOs in the United States
On February 6, 2018, Chairman Clayton of the Securities and Exchange Commission (SEC) and Chairman Giancarlo of the Commodity Futures Trading Commission (CFTC) testified before the Senate Banking Committee (the Committee) on their agencies’ oversight role for virtual currencies. Consistent with his prior statements, Clayton took a strong stance on SEC regulation of Initial Coin Offerings (ICOs). But, when it came to cryptocurrencies themselves, he and Giancarlo struck a somewhat more circumspect tone. In particular, despite acknowledging that their existing jurisdiction does not extend to spot transactions in cryptocurrencies, the Chairmen did not yet seek additional regulatory authority.
However, Chairman Clayton particularly expressed concerns about whether virtual currency exchanges provided adequate protections for investors and whether state regulation as payment services was sufficient. While the Chairmen did not request new authority, it is clear that there would be support within the Committee for legislation in this area, and Clayton and Giancarlo committed to work with each other and other authorities (including bank regulators and law enforcement authorities) to develop an appropriate approach. When the Chairmen of the SEC and CFTC express that they are “open” to exploring whether increased federal regulation is needed, there is a clear message. Continue Reading SEC and CFTC Testimony on Virtual Currencies: Is More Regulation on the Horizon?
Recent media reports, including in State-connected media, suggest that China is about to block access to all cryptocurrency trading platforms, including those operating overseas. In September 2017, the People’s Bank of China (“PBOC”) and six other government agencies jointly issued guidance immediately banning fundraising through offerings of tokens, such as initial coin offerings (“ICOs”), and requiring the closure of cryptocurrency exchanges in China by the end of September 2017. Continue Reading Chinese Government Moves To Effectively Ban Cryptocurrency Trading