During a January 19, 2021, webinar with the SIFMA Compliance & Legal Society, FINRA president and CEO Robert Cook discussed with participants FINRA’s priorities for 2022. Perhaps unsurprisingly, these priorities include an upcoming Regulatory Notice relating to the sale of cryptocurrencies by member firms, as well as planned changes to options account opening paperwork and proposed revisions to FINRA’s framework on obtaining expungements.
FINRA Expects To Issue Another Regulatory Notice On Digital Assets
With cryptocurrencies and digital assets increasing in popularity among investors of all ages and risk profiles, it comes as no surprise that FINRA plans to issue a regulatory notice with respect to the rules around advertising and disclosures in connection with the sale of cryptocurrencies and digital assets by or through FINRA member firms. Cook made clear, however, that FINRA is not looking to regulate or fundamentally change the regulatory structure with regard to cryptocurrencies and digital assets, because FINRA will defer to the Securities and Exchange Commission (SEC), Congress and other federal agencies on standards governing digital assets. Notably, Cook echoed concerns about the number of regulators overseeing the various types of crypto assets – a view shared by many digital asset market participants, perhaps for different reasons – which he believes could create confusion among investors.
As evidenced by its prior Regulatory Notices 18-20, 19-24 and 20-23, FINRA has been “encouraging” (a term to foreshadow future mandates) firms to keep their Risk Monitoring Analyst (previously known as “Regulatory Coordinator”) informed if the firm, or its associated persons or affiliates, has engaged, or intends to engage, in activities related to digital assets, including digital assets not considered to be securities.1 FINRA has repeatedly listed the types of activities of interest to the extent undertaken (or planned to be undertaken) by a member firm, its associated persons or affiliates, which includes, but is 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;
- recommending, soliciting or accepting orders in cryptocurrencies and other virtual coins and tokens;
- displaying indications of interest or quotations in cryptocurrencies and other virtual coins and tokens;
- providing or facilitating 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.
There is no timetable for the forthcoming regulatory notice, which is expected to reiterate prior notices, further explain current guidelines, and examine ways in which the rules should evolve with a focus toward investor protection. More specifically, Cook expressed concern that, because investors are buying digital asset investments from FINRA member broker-dealers, they may not appreciate the difference between investments which do and do not constitute securities under the existing regulatory framework. Therefore, it is expected that the forthcoming regulatory notice will explore whether additional enhanced requirements should apply to assist investors in understanding when their investments are regulated or fall outside of the broker-dealer regulatory scheme, despite the fact that the investors are dealing with the same broker-dealer.
FINRA Plans To Update Rules About Options Account Opening
Cook also discussed FINRA’s intention to issue a separate regulatory notice seeking comments from member firms in connection with planned rule changes to affect the opening of options accounts. FINRA’s existing rules on options are extensively detailed within FINRA Rule 2360. FINRA’s plan to implement changes stems largely from recent frenzied trading activity, including the short squeeze of Gamestop stock in mid-2021, and FINRA’s over-arching interest in increased investor protection as it relates specifically to options. During the webinar, Cook explained to participants that existing rules for opening options accounts “were adopted a long time, decades and decades ago.” He further elaborated that with innovation, and increased market accessibility to investors, many of the existing rules “don't apply anymore in all circumstances.” As a result, FINRA is expected to engage member firms to examine how the rules can or should be adjusted to account for changes in technology and enhanced exposure to and availability by investors.
FINRA To Revisit Planned Changes To CRD Expungements
According to Cook, FINRA intends to revisit proposed changes to the processes for broker expungement of investor complaints in arbitration. FINRA plans to release a white paper to provide data and statistical analysis relating to expungements, as well as alternative approaches for handling the removal of a client complaint from a member firm or associated person’s permanent Central Registration Depository (CRD) record.
FINRA’s rule on expungement, Rule 2080, places the burden on the FINRA member or associated person by requiring, among other things, that the FINRA member or associated person demonstrate to a FINRA arbitration panel that “the claim, allegation or information is factually impossible or clearly erroneous; the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or the claim, allegation or information is false.” Rule 2080 also requires that the associated person pay all fees in connection with a request for expungement and requires them to obtain an order from a court of competent jurisdiction to confirm any expungement award to clear their CRD. In connection with the filing with the court, the FINRA member or associated person is obligated to name FINRA as a party to the action or otherwise seek a waiver of this obligation by separate request to FINRA, which is often time-consuming and duplicative.
On September 22, 2020, FINRA sent proposed rule changes for an overhaul of the expungement process to the SEC for approval. FINRA’s proposed rule changes expanded the obligations and increased the burden on the party seeking expungement. More specifically, the proposed changes included the creation of time limits on when expungement can be requested, requiring a separately filed request (filed separately from a customer arbitration) to be filed within two years of the close of the underlying litigation or within six years of the complaint not involving litigation being reported to the CRD. The proposed rules also would have created a special roster of arbitrators that would be randomly assigned by FINRA to decide most expungement requests. Further, the changes would have required an associated person named as a party in a non-simplified customer arbitration to request expungement during that arbitration or forfeit the right to do so entirely.
However, that proposed rule change was scratched after the Public Investors Advocate Bar Association (PIABA) opposed the changes, claiming they were insufficiently burdensome on FINRA member firms and associated persons. Accordingly, on May 28, 2021, FINRA, in consultation with SEC staff, temporarily withdrew the proposed changes from the SEC’s consideration. Cook’s recent announcement indicates that FINRA is prepared to re-engage interested parties and continue its efforts to revise the expungement process. These changes are expected to increase the already burdensome process, to the detriment of FINRA members and associated persons.
Cook advised that FINRA plans to publish its examination priorities for 2022 sometime next month. We will be watching closely.
If you have any questions about the issues discussed in this article, please contact the attorneys in Riker Danzig’s Securities Litigation, Arbitration, Regulation and Investigations practice group.
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1 Per FINRA Regulatory Notice 20-23, “digital asset” refers to cryptocurrencies and other virtual coins and tokens (including virtual coins and tokens offered in an initial coin offering (ICO) or pre-ICO), and any other asset that consists of, or is represented by, records in a blockchain or distributed ledger (including any securities, commodities, software, contracts, accounts, rights, intangible property, personal property, real estate or other assets that are “tokenized,” “virtualized” or otherwise represented by records in a blockchain or distributed ledger).
