The Financial Industry Regulatory Authority said in its annual 2019 Risk Monitoring and Examination Priorities Letter that online distribution platforms, fixed income mark-up disclosure, sales practice risks, the supervision of digital assets business, market risks and financial risks would be among the new topics emphasized during its risk monitoring and examinations of members this year. Among market risks to be considered are best execution, market manipulation, market access, short sales and short tenders, while financial risks that will be emphasized are credit risk, and funding and liquidity. FINRA also indicated that, in 2019, it will explore how member firms are using regulatory technology to enhance their compliance efforts. In its annual letter, FINRA indicated that the topics it plans to emphasize this year are topics “member firms should consider as they identify opportunities to improve their compliance, supervisory and risk management programs.”
In its annual report of examination priorities issued in late December 2018, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations said that digital assets, cybersecurity and anti-money laundering programs would be among its top focus during its 2019 reviews of registrants. (Click here for background in the article “Offer and Sale of Digital Assets and Cybersecurity Among the Focus of SEC OCIE 2019 Examination Priorities” in the January 6, 2019 edition of Bridging the Week.)
Compliance Weeds: In its 2019 Risk Monitoring and Examination Priorities Letter, FINRA also indicated it would, this year, continue to assess member firms’ controls regarding outside business activities and private securities transactions.
Under FINRA rules, no registered person may be directly or indirectly employed in any other capacity in a business activity outside the scope of his or her relationship with his or her member firm unless he or she has given prior written notice to the member. (Click hereto access FINRA Rule 3270.) Additionally, a person associated with members must also provide advance written notice to his or her employer if he or she may engage in a securities transaction outside the regular course or scope of his or her employment, including new offerings of securities which are not registered with the SEC, subject to various exceptions and conditions. (Click here to access FINRA Rule 3280.)
Last year, Arthur Meunier a/k/a Arthur Breitman agreed to be suspended for two years from association with any FINRA-regulated broker-dealer to settle FINRA charges that, from February 2014 to April 2016, he participated in the development of Tezos, a blockchain technology project, without notifying the broker-dealer he was then employed by of such activity, as required by FINRA rules. (Click here for background in the sub-article “FINRA Fines a Tezos Co-Founder” in the April 22, 2o18 edition of Bridging the Week.)
Also last year, FINRA commenced a disciplinary proceeding against Timothy Ayre for trying to attract investors to purchase shares in a worthless company he owned and served as president – Rocky Mountain Ayre, Inc. (“RMTM”) – by making material misstatements in public filings, and by unlawfully offering to the public digital assets – HempCoins – that he claimed were backed by RMTM common stock. FINRA also claimed that Mr. Ayre engaged in private securities transactions involving RMTM while employed by a broker-dealer without disclosing such transactions to his employer, in violation of the firm’s written supervisory procedures.
FINRA’s inclusion of an additional charge against Mr. Ayre for his engagement in private security transactions involving RMTM while employed by a broker-dealer that required disclosure of such transactions, as well as its earlier action against Mr. Ayre, coupled with the current FINRA Letter, are implicit warnings to member firms that it is best to ensure they have WSPs that track applicable FINRA rules regarding outside business activities and private securities transactions. Moreover, member firms should remind their associated persons that these requirements apply to relevant transactions involving security tokens as well as business activities involving all digital assets, in addition to traditional securities and business activities.
