FINRA Regulatory Notice 19-18 is a specific guidance document issued by the Financial Industry Regulatory Authority (FINRA) concerning broker-dealers’ obligations when dealing with digital assets that are securities. It serves to clarify existing regulatory requirements under federal securities laws and FINRA rules as they apply to firms engaging in activities involving cryptocurrencies. The notice emphasizes considerations related to compliance, custody, valuation, and market manipulation in this emerging asset class.
Mechanism
The notice operates by interpreting and applying established securities regulations to the nascent crypto asset landscape. It mandates that broker-dealers conduct thorough due diligence to determine whether a digital asset constitutes a security, triggering specific registration and operational requirements. The mechanism involves firms assessing their business models against these guidelines, which cover areas like anti-money laundering (AML), cybersecurity, and suitability of recommendations. It functions as a framework for regulatory oversight in the digital asset securities sector.
Methodology
Adherence to FINRA Regulatory Notice 19-18 requires a methodical approach to compliance, beginning with a legal analysis of each digital asset to ascertain its classification. Firms must implement robust internal controls for managing and safeguarding digital asset securities, including segregated custody solutions and valuation methodologies. The methodology extends to ensuring proper disclosure to clients regarding the risks associated with digital asset investments and establishing supervision systems to prevent fraudulent activities. It necessitates continuous training for personnel and periodic review of compliance programs.
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