Background & Summary

On July 8, 2019, the US Securities and Exchange Commission (SEC) issued a joint statement in conjunction with FINRA’s general counsel addressing various elements of digital currency amid request for clarity on whether broker-dealers can hold digital assets under federal securities laws. The regulator reiterated its growing concerns relative to investor protection and clarified the fact that entities seeking to participate in digital currency markets must comply with relevant securities laws. The release placed specific emphasis on compliance with the customer protection rule. While recounting the success and importance of the customer protection rule, the SEC added, "[t]his record of protecting customer assets held in custody by broker-dealers stands in contrast to recent reports of cyber theft, and underscores the need to ensure broker-dealers robust protection of customer assets, including digital asset securities."

With respect to custody and digital securities, the SEC’s statement would seem to indicate that the regulator seeks to regulate such assets as uncertificated securities (i.e. ownership is confirmed via electronic certificate rather than a physical one). As such, broker-dealers would likely need to establish custody through the use of an SEC registered transfer agent, who would also maintain applicable records relating to security ownership. The statement also seems to allude to the fact that custodying digital assets through the use of digital wallets and maintaining private keys that would be controlled by the broker dealer are unlikely to be looked upon favorably, or ultimately approved by regulators. While the tone of the statement seems to be geared towards preparing digital securities for more mainstream access (i.e., gearing it towards retail investors), the bottom line for regulators, as evidenced by this release, is customer protection. As the industry navigates the nuances of digital securities markets, it should do so through the lens of protecting against fraud, theft, or misappropriation of client funds and/or information. 

Our Take

As always, it is our position at CRC that cooperation with regulators is key for the successful operation of financial services organizations. Regulators have continued to display heightened focus on the protection of retail and senior investors. As such, digital currency in particular is a developing area where cooperative, responsible players will hold the ace. Prompt, efficient, and honest communication and responses will satisfy regulators and clients alike, while also and bringing a sense of legitimacy and scrupulousness to digital currency operations. If you would like to speak with one of our Compliance Specialists about custody implications or have any other questions regarding digital currency, please do not hesitate to contact us. 

Contact Mitch Avnet at mavnet@compliance-risk.com or (646)346-2468 for more information. 

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With 2018 behind us and 2019 underway, we find ourselves in a position to look back across the regulatory landscape on what transpired over the course of 2018 in an effort to anticipate what this year may bring for Broker-Dealers.

Fast Facts Video

For those who are pressed for time, we’ve narrowed down the bare necessities into this 3 minute Fast Facts video. Press play and enjoy!

In the Annual Broker-Dealer Regulatory Review and 2019 Outlook, Kaitlyn Gibbs recaps the key takeaways from 2018 and what's expected to be at the center of regulatory development in 2019.

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With 2018 in the rear-view mirror and 2019 underway, we find ourselves in a position to look back across the regulatory landscape on what transpired over the course of last year in an effort to anticipate what this New Year may bring for Investment Advisers.

For those who are pressed for time, we've narrowed down the bare necessities into this 2 minute Fast Facts video, press play and enjoy!

Download The Investment Advisers 2018 Regulatory Review and 2019 Outlook

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Annual Compliance Services Offerings

The end of 2018 is approaching quickly. CRC would like to remind you that for brokers and advisers with a December
fiscal year-end, annual amendments have filing deadlines 60 to 90 days following December 31st. To facilitate
streamlined regulatory reporting and filing, CRC offers a suite of services, as outlined below.

Adviser Offerings:

Form ADV Filings
Assistance with Drafting, Reviewing, and Filing Form ADV Parts 1, 2A, and 2B (deadline March 31, 2019)
Reviewing and Assessing State Registrations and Notice Filings and Supplemental Financial Statement Requirements, as
Necessary
Other Regulatory Filings
Annual updates to Forms 13F (due February 14, 2019), 13G (due February 14, 2019), and 13H (due February 14, 2019)
Administration of CRD/IARD Account
Annual Review & Compliance Training
Annual 206(4)-7 Review Support, Execution, and Report Delivery
Annual Compliance Training (Under rule 206)
Other Services
Risk Assessment – regulatory best practice, not a requirement
Penetration Testing – CRC can liaise with a third-party vendor to facilitate a comprehensive evaluation of the firm’s network
security. Regulatory best practice, not a requirement
Annual Updates to Code of Ethics and Compliance Manual, as Necessary (must be completed annually, no specific
deadline)
Policy and Procedure Review & Updates (Cybersecurity, Business Continuity Plan, Privacy Policy etc.) (must be reviewed
and updated as regulation changes or new regulatory guidance is made available, no specific deadline, best practice to
review annually)

Broker-Dealer Offerings:

AML Review – ensure that the firm has completed an annual AML review as required under FINRA Rule 3110
Annual 3120 Review – ensure that the firm has completed a comprehensive review of the compliance program, as
required by FINRA Rule 3120
Completion of 3130 certification
Administration of CRD/IARD Account – CRC is available to manage firm’s CRD/IARD account to complete annual
amendments, filings, and payments.
Annual Compliance Training – ensure that you have held Compliance Training for firm personnel for FY 2018, as required
under FINRA Rule 3110.

Ongoing Support

As always, we are available to service all of your ongoing Compliance. At CRC, we believe that an effective Compliance
program is a proactive one, which is why we are continually keeping abreast of changes that occur throughout the year.
The regulatory landscape is constantly evolving, and we are here to help enhance your program so that you can stay on
top of it all.

Use the form below to sign up for a complimentary consultation:

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Coinbase, who recently acquired broker-dealer Keystone Capital Corp in June 2018, announced the addition of Jeff Horowitz as the Cryptocurrency exchange’s new Chief Compliance Officer. Prior to joining Coinbase, Horowitz served as the Global Head of Compliance at Pershing, and previously held positions managing AML and compliance programs at Citigroup and Goldman Sachs.

"As Coinbase — along with the cryptocurrency space as a whole — grows and matures, continued regulatory compliance across all the varying jurisdictions globally will be critical," Coinbase President and Chief Operating Officer Asiff Hirji wrote in a blog post Tuesday. "Adding Jeff to our team is one more important step along this journey."

Following the acquisition of Keystone, which included Venovate Marketplace, LLC, Coinbase is registered as an Alternative Trading System (ATS) with the SEC, which allows them to trade securities in a regulatory compliant manner. This is a path that US-based crypto exchanges and offering platforms will need to take if they plan to sell or trade blockchain-based securities in the future.

Coinbase’s strategy and recent actions towards building out a program to comply with anticipated regulation support CRC’s steadfast position that the key to operating successfully in the digital currency market is continually moving towards legitimizing the asset class, not only from the prospective of regulators, but institutional and wary retail investors as well.  Scrupulous attention to regulatory developments and visible effort to serve the best interest of clients and safeguard assets and personal information will distinguish a crypto exchange from it’s regulation-shirking counterparts in the industry. CRC continues to maintain that this approach will satisfy regulators and investors alike, and will allow the digital currency market to flourish within the bounds of regulation and client service.

CRC boasts a team of experts equipped to support your firm throughout the entire New Member Application (NMA) and ATS registration processes, from coordinating the initial steps to submitting the finalized application. For more information, or to speak with a Compliance Specialist about your digital currency needs, please contact Mitch Avnet at (646)346-2468 or mavnet@compliance-risk.com.  

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Background and Summary
On July 6, 2018, FINRA published Notice 18-20 regarding member firm involvement in digital currency. This notice addressed the fact that the market for digital assets, including cryptocurrencies and virtual coins, has grown significantly in recent months, particularly amongst retail investors. The regulator reiterated its growing concerns specific to investor protection, including incidences of fraud and other securities law violations involving digital assets and the platforms on which they trade.

As such, FINRA has indicated an interest in remaining well-informed of the extent to which member firms are involved in this space. Firms that engage or begin to engage in such activities are reminded to consider all applicable federal and state laws, rules and regulations, including FINRA and SEC rules and regulations.

To better understand the scope of such activities, FINRA Regulatory Coordinators recently conducted a survey regarding firms’ involvement in activities related to digital assets. In addition, the 2018 RCA Survey contained questions regarding digital assets. FINRA announced in this Notice that it is supplementing these efforts by requesting that each firm promptly provide notification to its Regulatory Coordinator if it or its associated persons (including activities under Rules 3270 and 3280) or affiliates, currently engages (or intends to engage) in activities related to digital assets, including digital assets that are non-securities. The types of activities of interest to FINRA if undertaken (or planned) by a member, its associated persons or affiliates, include, 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.

Our Take
As always, it is our position at CRC that cooperation with regulators is key for the successful operation of financial services organizations. Regulators have continued to display heightened focus on the protection of retail and senior investors. As such, digital currency in particular is a developing area where cooperative, responsible players will hold the ace. Prompt, efficient, and honest communication and responses will satisfy regulators and clients alike, while also bringing a sense of legitimacy and scrupulousness to digital currency operations.

If you need assistance drafting a response to this request, or have any other questions regarding digital currency, please do not hesitate to contact Mitch Avnet at mavnet@compliance-risk.com.

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According to the 2018 Exam Priorities Report released in February, OCIE plans to monitor the sale of products in the cryptocurrency and initial coin offering markets and examine for regulatory compliance in instances where products are determined to be securities.

It is expected that the SEC, and likely FINRA, are aiming to treat cryptocurrencies as securities in the near future, which would mean that appropriate registration of all parties involved in managing, trading, holding, or transferring them is the key to avoiding regulatory trouble and enforcement actions. Investors of varying levels of sophistication, entering the crypto space will likely place more trust – and therefore funds- in a company that is conscious of regulatory implications and relevant securities laws.

A clear picture is emerging of what it means to be a trustworthy, legitimate business operating in this space, principally: liquidity of investments, visible efforts to protect client assets and data, and transparent and accessible communication with clients. Regulators want to see that you are putting the needs of your clients ahead of your own; investors want to know that you are not just another digital currency scam. In a developing and volatile cryptocurrency market full of unknowns, it is better to be safe than sorry.

Download Regulatory Focus: Cryptocurrency

Showing good faith with regulators by ensuring compliance with securities laws and adopting appropriate policies and procedures surrounding cryptocurrencies holds the potential to pay off in the end – with regulators and investors alike.

In Regulatory Focus: Cryptocurrency, Kaitlyn Gibbs walks through the key areas of consideration for financial institutions looking to enter or already operating in the cryptocurrency market to help facilitate compliance with regulatory guidance and avoid regulatory issues, including: determining whether a coin offering should be considered a security, The Howey Test, safeguarding client assets and data, best practice and adequate disclosure of risks.

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Compliance Risk Concepts presents Fast Facts: Customer Due Diligence, A Quick Guide To FinCEN’s New Requirements. It offers a snack-size snapshot of key points from our more detailed regulatory release Understanding FinCEN’s Customer Due Diligence (CDD) Final Rule, that outlines FinCEN’s new Customer Due Diligence (CDD) Final Rule, in advance of its effective date on May 11, 2018.

New Fast Facts Video Series

To help Compliance professionals stay ahead of the curve in a regulatory environment that is constantly evolving, our dedicated compliance team is persistently researching regulatory updates and getting material out there to help give our clients a leg up. While these resources are useful, we understand that industry professionals have their plates full designing and running compliance programs and performing a wide breadth of day to day functions.

To that end, we are making an effort to pair our detailed regulatory releases and analysis with palatable, to the point digital shorts, like the one above, to relay material industry information to our clients. These videos, typically running one to two minutes, serve as a regulatory highlight reel and give an overview of pending regulatory updates, guidance from governing bodies, and hot issues without taking up too much valuable time.

Download Understanding FinCEN’s CDD Final Rule

The CDD Final Rule is a move toward increased financial transparency- a growing trend for regulatory bodies in 2018. While financial institutions have until May 11, 2018 to ensure compliance with the Final Rule, as a best practice, they should also consider implementing a process to review and update this information on a regular basis.

In Understanding FinCEN’s Customer Due Diligence (CDD) Final Rule, Kaitlyn Gibbs outlines the four central principles of the CDD Final Rule and offers insight on the five things Financial Institutions should remember when updating AML procedures.

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Now that 2017 has ended and 2018 is emerging on the regulatory horizon, we find ourselves in a position to look back on what has transpired over the course of the past year in an effort to anticipate what the New Year may bring for Broker-Dealers.

In the following Annual Broker-Dealer Regulatory Review and Outlook (2017), Kaitlyn Gibbs offers her perspective on what the highlights were in 2017, as well as what will be at the center of regulatory development in 2018.

Download Annual Broker-Dealer Regulatory Review and Outlook

To download your complimentary copy of the Annual Broker-Dealer Regulatory Review and Outlook (2017), use the form below:

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