FINRA to issue crypto notice, consider options and expungement reform


Amid the millions of new retail investors during the pandemic and concerns about Americans’ low financial literacy, FINRA plans to issue a regulatory notice about cryptocurrency.

The guidance to more than 3,400 firms and 617,000 registered representatives overseen by FINRA will cover “the rules around the sale of crypto assets by or through our member firms and in particular advertising and disclosure requirements,” CEO Robert Cook said in a webinar held Jan. 19 by the Securities Industry and Financial Markets Association’s Compliance and Legal Society. With massive investor interest in cryptocurrency and related technology, and major industry concern about the makeup of any pending rules, Cook said FINRA is “not looking to regulate or fundamentally change the regulatory structure” since it defers to the SEC, Congress and other federal agencies on the question of standards governing digital assets.

In addition to discussing cryptocurrency, Cook mentioned possible updates to FINRA’s rules about options account opening and broker expungements. Both topics come up frequently in regulatory and arbitration cases, and, as with digital assets, many of the rules about options and complex products in general stem from an era before the internet and smartphone apps.

With respect to cryptocurrency, FINRA’s guidance to members will explain the current guidelines and look into the question of “how should those rules evolve and to make sure that we’re protecting investors appropriately,” Cook said. Later, SIFMA CEO Kenneth Bentsen asked Cook to elaborate for the audience of brokerage compliance professionals.

Many retail clients in digital currency “may not know that they’re kind of flipping out of the broker-dealer regime into a different regime because they’re dealing with the same broker-dealer” while investing in various new products in the marketplace, Cook replied.

“Our member firms today are involved in the sale of digital assets, some securities, some not securities,” Cook said. “And when customers interface with one of our members and then buy cryptocurrency or buy a digital asset, there are disclosure rules that apply today. And we want to take the opportunity to talk about those and also to see if there are additional enhanced requirements that ought to apply when people buy a product that’s regulated like a security product and then buy a product that’s not regulated.”

Cook didn’t give any timetable for issuing the notice, though it will surely attract the attention of firms and reps when it comes out. Clients of all ages want more information about crypto, non-fungible tokens and the uses of blockchain ledgers, according to Earl Carr, the CEO of research, consulting and advisory firm CJPA Global Advisors. Digital currency can act as a source of diversification in a portfolio, and emerging technologies aiming to reduce the electricity required for crypto assets like Bitcoin could turn them into a sustainable investment, Carr said.

“Most people would say it’s kind of antithetical to ESG,” he said. “The more that we can develop other types of alternative usages and ways to redefine an ecologically good cryptocurrency, this is something that would really resonate with a lot of investors.”

Last year’s GameStop short squeeze displayed the potential risks of investors’ increasing embrace of options and leverage at the same time. It also came after no shortage of compliance cases and arbitration awards involving margin trades or products and strategies using them. In coming months, FINRA plans to issue a separate regulatory notice asking firms for comment about how it should proceed with any new rules about opening options accounts, Cook said.

“Those rules were adopted a long time — decades and decades — ago,” he said. “We’ve seen this terrific innovation in making our markets more accessible to retail investors, but some of that rule set was sort of based on certain presumptions about how you open an account and how you access those markets that don’t apply anymore in all circumstances. And so this is really a question about whether those rule sets need to be tuned up in light of the changes in technology.”

Besides issuing the two notices, FINRA aims to work this year on a couple of different fronts with respect to broker expungements in arbitration. Over the next several months, FINRA will release a white paper that provides “some data and some statistical analysis and discussion about what’s going on today in the expungement space,” as well as some alternative approaches to broker requests to remove a client complaint from their permanent Central Registration Depository record, Cook said.

“And then we want to engage in further dialogue with all the interested stakeholders in this space in parallel, because designing any new system is going to take time,” he said. “We want to continue working on a revised package of amendments to the existing arbitration-based process, and we think these amendments would help provide greater confidence that expungements are only happening in accordance with the kind of limited circumstances identified in our rules, when the CRD information is clearly inaccurate.”

One of those stakeholders, the Public Investors Arbitration Bar Association Foundation, has been waiting on engagement with FINRA after it withdrew a rule proposal last year that the client advocate group criticized as insufficient, President Lisa Bragança of Bragança Law said in an interview earlier this month. Cook made similar comments about expungement in the fall.

“Despite the fact that the Foundation and PIABA have put out reports and have studied this over the course of years, FINRA has not indicated to us what they’re doing,” Bragança said. “The rule was withdrawn back in May. Since then, they’ve had nothing to say to us and they haven’t wanted to hear from us. We’ve reached out multiple times. If they’re working with stakeholders, then they’ve chosen other stakeholders.”

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