On June 24, 2020, the New York State Department of Financial Service (NYDFS) announced a series of virtual currency initiatives aimed at providing additional opportunities and clarity for BitLicense and limited-purpose trust company applicants and licensees. These initiatives include:
- A proposed framework for obtaining a conditional BitLicense when partnering with an existing licensee
- A proposed approach for NYDFS pre-approval of certain virtual currencies and a licensee’s ability to self-certify the use of new virtual currencies
- New procedures aimed at creating a more transparent and timely process for reviewing BitLicense applications
- A BitLicense FAQ page
The NYDFS’s press announcement stated that these initiatives were developed based on feedback from the industry to make it easier for virtual currency companies to successfully operate in New York. If the stated intent is achieved, these initiatives will be a welcome change for virtual currency businesses, which have often faced long timelines and a burdensome review process when submitting a BitLicense application or attempting to expand their approved activities. It remains to be seen, however, whether those objectives can be met.
On June 10, the Financial Industry Regulatory Authority (FINRA) released its Artificial Intelligence (AI) in the Securities Industry Report (Report), a culmination of a two-year review by FINRA’s Office of Financial Innovation to learn about the emerging challenges confronted by broker-dealers (Firms) and other market participants as they introduce AI-based applications into their businesses. The Report provides an overview of AI technology, explores its diverse, multifaceted applications in the securities industry and identifies the challenges and legal considerations with leveraging this technology. FINRA requests industry feedback on topics covered in the Report by August 31, 2020.
The U.S. Office of the Comptroller of the Currency (OCC) has issued an Advance Notice of Proposed Rulemaking (ANPR)1 seeking input on how best to accommodate new technology and innovation in the business of banking, in connection with the OCC’s “comprehensive review” of its regulations at 12 C.F.R. part 7, subpart E (national banks), and part 155 (federal savings associations) (collectively, Rules). The ANPR offers industry participants an opportunity to shape future guidance and remove regulatory burdens to offering innovative new products, partnering with technology companies and enhancing operations through deployment of new technologies. The ANPR follows on the heels of regulators’ other efforts to address technological developments,2 with the caveat that the OCC is not seeking comment on authority to issue special purpose national bank charters.
On May 18, 2020, the Financial Crimes Enforcement Network (FinCEN), as part of its COVID-19-related response, issued a Notice Related to the Coronavirus Disease 2019 (COVID-19) reminding financial institutions of certain Bank Secrecy Act (BSA) obligations and pertinent information regarding reporting COVID-19-related criminal and suspicious activity (the Notice). Contemporaneously, FinCEN issued an Advisory on Medical Scams Related to the Coronavirus Disease 2019 (COVID-19) (the Advisory).
In light of the Notice and Advisory, firms should (a) continue to comply with their BSA obligations; (b) include COVID-19 detail only when that detail relates to the reported suspicious activity; (c) review policies and procedures to notify and to provide COVID-19 information to government agencies, including verification of the requesting agency; (d) review the Advisory red flags related to medical scams; and (e) consider revising policies and procedures as appropriate.
COVID-19-related frauds are a special emphasis for law enforcement and regulatory agencies, so failing to detect and report those issues could be viewed as a significant flaw in a firm’s anti-money laundering (AML) program.
Listen to The Sidley Podcast for an informative discussion of how blockchain, digital assets and virtual currencies are changing the way we transact
Blockchain technology has the ability to transform how business and everyday commercial transactions are conducted across industries. This emerging technology represents more than just an incremental improvement in business practices — it could actually disrupt how we do business. What is blockchain, how will it affect the way we communicate and transact with each other and why are cryptocurrencies being used in conjunction with this technology?
We get answers to these questions and many others in the latest episode of The Sidley Podcast. Podcast host and Sidley partner Sam Gandhi speaks with Lilya Tessler, a partner in the firm’s New York office, who focuses her practice on the corporate and regulatory aspects of blockchain technology.
On February 6, 2020, U.S. Securities and Exchange Commission (SEC or Commission) Commissioner Hester M. Peirce (Commissioner Peirce) gave a speech describing the need for more clarity on application of the securities laws to the offer and sale of blockchain tokens or digital assets. As part of the speech, she proposed a safe harbor (Proposal or Safe Harbor) exempting certain tokens from the registration requirements of the Securities Act of 1933 (Securities Act) and Securities Exchange Act of 1934 (Exchange Act), including an exemption for persons engaging in certain transactions with respect to such tokens from the definitions of “exchange,” “broker” and “dealer” under the Exchange Act. The Proposal is of significance to any existing or future blockchain development team considering the distribution of tokens, as well as any digital asset exchange or over-the-counter desk that facilitates transactions in digital assets, blockchain tokens or virtual currencies.
The U.S. Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations (OCIE) and the Financial Industry Regulatory Authority (FINRA) recently published their examination priorities (together, the Examination Priorities) for the 2020 calendar year.1 In general, the 2020 Examination Priorities continue recurring themes from recent prior years.
OCIE’s 2020 Examination Priorities for broker-dealers and investment advisers include the protection of retail investors (including compliance with new standard of care requirements and interpretations), cyber and information security risks, anti-money laundering compliance, firms engaging in the digital asset space and the provision of electronic investment advice.
FINRA’s 2020 Examination Priorities for member firms include those generally identified by OCIE for registered broker-dealers, as well as cash management and bank sweep programs, initial public offerings, liquidity management, trading authorizations and order routing and vendor display rule requirements, among others.
This post summarizes selected aspects of the Examination Priorities that may be of particular interest to broker-dealers and investment advisers. As always, firms should use the 2020 Examination Priorities 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 SEC and/or FINRA examinations, as applicable, and provide documentation of relevant reviews.
On January 14, 2020, the U.S. Securities and Exchange Commission (SEC) Office of Investor Education and Advocacy published an investor alert (Alert) regarding initial exchange offerings (IEOs), a type of digital asset fundraising facilitated by online trading platforms.1 Although the Alert is directed at investors, it provides important information to blockchain companies and trading platforms. The Alert highlights the following:
- an explanation of an IEO
- IEOs that are securities offerings must comply with federal securities laws
- a platform offering an IEO may need to register as a broker-dealer, national securities exchange or operate pursuant to an exemption, such as an alternative trading system (ATS)
- IEOs offered to U.S. investors, even if offered from outside the United States, must comply with federal securities laws
The California Department of Business Oversight (CDBO) recently concluded that the point of sale consumer financing programs offered by Sezzle, Inc., and another, unnamed party constituted making loans for purposes of the California Financing Law (CFL). A number of payment providers and technology companies have been developing innovative payment options, including consumer financing options, that are facilitated by advances in technology and mobile connectivity. Some market participants have structured their products such that a license should generally not be required under state law. The CDBO’s actions, however, may require companies to revisit that analysis and consider their licensing obligations.
On December 3, 2019, the five federal banking agencies1 issued a joint statement (the “Joint Statement”) regarding the use of alternative data for credit underwriting. The Agencies highlighted potential benefits that may arise from the use of alternative data, including the ability to make faster and more accurate credit determinations and the potential to provide credit at a lower rate or to individuals or small businesses that would otherwise be unable to access it. While the Agencies issued approving language regarding the use of certain types of alternative data, they also cautioned that the use of alternative data may have consumer protection implications, including fair lending, prohibitions against unfair, deceptive or abuse acts or practices and the Fair Credit Reporting Act.