On October 11, 2019, the leaders of the U.S. Commodity Futures Trading Commission (CFTC), the Financial Crimes Enforcement Network (FinCEN) and the U.S. Securities and Exchange Commission (SEC) (together, the Agencies) issued a joint statement highlighting the application of anti-money laundering and countering the financing of terrorism (AML/CFT) obligations under the Bank Secrecy Act (BSA) to persons engaged in activities involving digital assets (Joint Statement). On the same day, the SEC filed an emergency action to halt a digital asset distribution, citing BSA/AML concerns.1
On July 8, 2019, the long-awaited statement (Statement) on custody of digital asset securities was released jointly by the staffs (Staffs) of the U.S. Securities and Exchange Commission (SEC) Division of Trading and Markets and the Financial Industry Regulatory Authority (FINRA).1 The Statement is based on industry discussions with the Staffs and highlights the following:
- Certain noncustodial broker-dealer models may have a path forward for FINRA approval.
- The Staffs have concerns relating to broker-dealer custody of digital asset securities that remain unanswered, but certain good control locations (i.e., banks, issuers and transfer agents) may provide a viable custody solution under the Customer Protection Rule.2
- Market participants should consider other broker-dealer requirements, including books and records and financial reporting rules.
On April 3, the U.S. Securities and Exchange Commission (SEC)’s Strategic Hub for Innovation and Financial Technology (FinHub or Staff) released its much-anticipated guidance, the Framework for “Investment Contract” Analysis of Digital Assets (Framework), regarding its views on factors to consider in applying the Howey test to digital assets. In conjunction with the Framework, the SEC’s Division of Corporation Finance published its first no-action letter in connection with the sale of digital assets, providing relief to TurnKey Jet, Inc., for its proposed token sale.
On February 8, 2019, U.S. Securities and Exchange (SEC) Commissioner Hester Peirce delivered a speech addressing the relationship between technological innovation and regulation, in particular addressing some of the pending regulatory challenges surrounding blockchain and digital assets.1 The key takeaways from Commissioner Peirce’s speech, titled “Regulation: A View From Inside the Machine,” 2 are these:
On January 17, the Financial Industry Regulatory Authority (FINRA) released its annual Risk Monitoring and Examination Priorities Letter (Letter), which identifies topics that FINRA will focus on in 2019. Unlike in previous years, this Letter primarily discusses new topics and priorities in areas of ongoing concern while not repeating topics that have been at the center of FINRA’s attention over the years. FINRA notes, however, that while traditional topics such as cybersecurity,1 recidivist brokers and anti-money-laundering (AML) may not be discussed extensively in the Letter, FINRA will nonetheless review firms for compliance regarding these areas of focus.
As always, firms should use the Letter to review their compliance and supervisory procedures carefully and make any necessary revisions. Firms also should be prepared to explain their compliance and supervisory policies in these areas in their upcoming FINRA examinations and provide documentation of relevant reviews. The following is a discussion of some of the more salient points of the FINRA Letter. (more…)
On November 16, the U.S. Securities and Exchange Commission (SEC) announced its first enforcement actions against issuers of initial coin offerings solely for failing to register the offerings in violation of the federal securities laws since Munchee (i.e., without allegations of fraud). Unlike the Munchee order, these settlements impose penalties against the issuers and require certain undertakings, such as registering the digital assets as securities under the Exchange Act. The same day, the SEC’s Divisions of Corporation Finance, Investment Management and Trading and Markets released a joint statement reiterating the SEC’s lessons from recent enforcement actions related to digital assets. (more…)
On July 31, 2018, the U.S. Office of the Comptroller of the Currency (OCC) announced its decision (the Fintech Charter Decision) to begin accepting applications from financial technology (fintech) companies for special purpose national bank charters.1 The OCC has indicated it will not grant a charter to a fintech company that wishes to accept deposits or engage in fiduciary activities (for business plans that involve purely fiduciary activities, a limited purpose trust charter may provide an alternative vehicle). The Fintech Charter Decision is discussed in greater detail in a prior Sidley Banking and Financial Services Update.2
On September 14, the New York State Department of Financial Services (DFS) filed a federal court complaint seeking to enjoin further actions by the OCC to implement the Fintech Charter Decision and related actions, arguing that such acts are lawless, ill-conceived and destabilizing of financial markets. DFS also argued that such acts are beyond the OCC’s statutory authority and in violation of the Tenth Amendment to the U.S. Constitution, alleging that the police power to regulate financial services and products delivered within a state’s own geographical jurisdiction is among a state’s fundamental sovereign powers.3 (more…)
On September 11, the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) separately announced three “first of their kind” enforcement actions against participants in the digital asset (or “token”) market:
- In the Matter of TokenLot LLC. The SEC took action against a token sale website for operating as an unregistered broker-dealer in violation of the federal securities laws.
- In the Matter of Crypto Asset Management, LP. The SEC entered an order against a digital asset hedge fund manager for failing to register its fund as an investment company and offering and selling its fund’s securities in an unregistered offering.
- Department of Enforcement vs. Timothy Tilton Ayre. In its first disciplinary action involving digital assets, FINRA filed a complaint alleging that a registered person of a member firm violated federal securities laws and FINRA rules in its offering of a blockchain token as an unregistered security.
In the months following director William Hinman’s noteworthy speech on whether and when a digital asset is subject to securities laws, U.S. regulators have continued their stern warnings regarding the importance of compliance with the securities laws. This post highlights three important regulatory updates:
- On August 14, 2018, the Securities and Exchange Commission (SEC or Commission) issued an administrative order, In the Matter of Tomahawk Exploration LLC and David Thompson Laurance, taking action against an unregistered and fraudulent initial coin offering (ICO).
- On August 28, the North American Securities Administrators Association (NASAA) released an update on the progress of its ongoing Operation Cryptosweep.
- The Financial Industry Regulatory Authority (FINRA) issued two investor alerts, on July 27 and August 16, regarding blockchain tokens and ICOs.