Rightly or wrongly, I don’t know much about cryptocurrencies or digital coins. But that’s ok. What is worrisome, on the other hand, is that I am increasingly concerned that FINRA doesn’t either. And while my own ignorance will have exactly zero impact on your day, that is most certainly not the case with FINRA.
I came to this conclusion after reading Reg Notice 19-24, released last week. On its face, the Notice seems fairly benign. What it does is extend by one year FINRA’s “request” that “each member keep its Regulatory Coordinator informed of new activities or plans regarding digital assets, including cryptocurrencies and other virtual coins and tokens.” You may recall that last year, in Reg Notice 18-23, FINRA issued its initial request for this sort of information through the end of July 2019. Now, FINRA is “encouraging” its member firms to keep this up for another year, through July 2020.
I don’t have any real problem with this “request,” apart from my usual cynicism when FINRA uses this particular word. Remember: FINRA characterizes its use of Rule 8210 as “requests” for documents and information, as if the recipient has a choice whether or not to respond, when, in fact, the failure to respond to the “request” can result in a permanent bar from the industry. No, my problem is that as FINRA attempts to gets its head around digital assets, as a result of the fact that it doesn’t necessarily understand the regulatory issues that such products will ultimately generate, it is asking for information beyond that which it is entitled to receive.
What do I mean? FINRA asks in the Reg Notice that firms supply all information regarding their activities relating to digital assets regardless “whether or not they meet the definition of ‘security’ for the purposes of the federal securities laws and FINRA rules.” This is a recurring problem my clients have when dealing with FINRA, i.e., having it stick its nose, or attempt to stick its nose, into things over which it has no regulatory authority. I am dealing with a case right now that presents a perfect case-in-point. My client, a broker, sits on the board of a company (not in the securities industry) that – years ago, well before any FINRA exam was commenced or even contemplated – passed a resolution that states that for privacy reasons, no corporate documents can be produced to any entity apart from a governmental agency or in response to a legally issued subpoena. Nevertheless, FINRA – which is not part of the government and has no subpoena authority – continues to “ask” my client (through 8210 letters) to produce corporate documents. Ultimately, there may be a showdown with FINRA over whether my client “controls” the requested documents because he is also the majority shareholder, which permits him – at least theoretically – to dictate the composition of the board, and create one that includes people willing to give FINRA the documents…which have nothing to do with any BD.
But I digress. What I was saying is that FINRA continues to push the boundaries of its jurisdiction, and not necessarily for any particularly good reason apart from the fact that it thinks it can. Here, FINRA wants to know everything that its member firms are doing with digital assets, regardless of whether or not such assets are securities. But, if they’re not securities, they’re not FINRA’s problem. That’s not, however, as FINRA sees it. FINRA likes to take existing rules and stretch them to their limits as a means of justifying its interest in non-securities business. In footnote 4 of the Reg Notice, FINRA makes this explicit when it writes that “[f]irms that engage in activities related to digital assets, whether or not they are securities, are reminded to consider all applicable FINRA rules and federal and state laws, rules and regulations.”
What the heck does this mean? I could be wrong, but seems to me that FINRA is making clear its view that it has the right to examine even non-securities business under the guise of some existing rule or regulation. And you need not even have to guess which ones. The footnotes make reference to Rule 3270, the outside business activity rule; Rule 3280, private securities transactions; trade reporting obligations; and both NMAs and CMAs. The point is, FINRA apparently feels that its existing arsenal of rules provide it sufficient coverage to require BDs to make disclosures about their non-securities business. But, that is not necessarily true, no matter how much FINRA may want it to be so.
And going back to my initial point, it is unclear, and troubling, that FINRA wants all this information even though at present it has no idea what, if anything, it means, or how it might possibly advance its interest in regulating the securities market. It was not too long ago that FINRA tried mightily to become the regulator of choice for investment advisors, but failed, rather publicly. Among the criticisms that were leveled at FINRA at the time was the thought that expanding the scope of its regulatory authority to include IAs was a mistake in light of the fact that FINRA was already challenged enough to do a decent job of that which it is mandated to do, i.e., regulate BDs. My point is simple: FINRA should stick to its knitting. Rather than worry about how/if it is going to deal with non-securities products such as certain digital assets, it would be better off spending its time and money and efforts becoming better at what it is required to do.