The calendar may have started anew in 2018, but federal regulators have affirmed that they are still firmly focused on one of 2017’s emerging issues—cryptocurrencies and, more specifically, initial coin offerings (ICO).
FINRA’s 2018 Regulatory and Examination Priorities Letter, which was released earlier this week, highlights ICOs and cryptocurrencies among several sales practice risks that FINRA will focus on in the coming year:
Digital assets (such as cryptocurrenices) and initial coin offerings (ICOs) have received significant media, public and regulatory attention in the past year. FINRA will closely monitor developments in this area, including the role firms and registered representatives may play in effecting transactions in such assets and ICOs. Where such assets are securities or where an ICO involves the offer and sale of securities, FINRA may review the mechanisms—for example, supervisory, compliance and operational infrastructure—firms have put in place to ensure compliance with relevant federal securities laws and regulations and FINRA rules.
Last month, we discussed the SEC Chairman’s recent statement on ICOs and previewed the numerous insurance coverage issues this interesting—yet potentially risky—investment vehicle poses to both the offering company and market professionals engaged to support the offering.
FINRA has now joined the SEC in signaling that federal regulators may begin targeting secondary actors in ICOs that likely have a wide variety of insurance products, including D&O, E&O, professional liability, cyber, crime, and other specialized policies. The range of coverage available among these forms varies greatly among industries, and even within the same industry. For example, brokerage firms and other parties to a securities transaction may have different exposures than banks, agents, or brokers assisting on that same transaction. All of these market participants, especially those in heavily scrutinized ICOs, face exposure in the form of regulatory enforcement, investor lawsuits, and other claims that are traditionally covered by insurance.
From insurer risk appetite to potential coverage gaps, ICOs and cryptocurrencies more generally present novel, complex issues for the insurance market, which has historically been slow to adapt to new technologies.
As Kevin LaCroix of RT ProExec recently commented, even assuming D&O coverage were available, there are a number of typical exclusions that would need to be addressed, such as exclusions for public offerings of securities and conduct exclusions precluding coverage for fraudulent misconduct and intentional violations of the law, among others.
FINRA’s 2018 priorities letter presents another reason for broker-dealers and other professionals in the financial services industry to evaluate their potential exposure, including with respect to the potential role that a robust insurance coverage program might play in mitigating such exposure. FINRA’s renewed focus on ICOs in 2018 underscores the importance of remaining proactive in addressing insurance issues before renewal and certainly before a claim arises.
Stay tuned for more ICO-related developments as we continue to monitor this important issue throughout the new year.