Welcome to the Regulatory Roundup. Each month, Eversheds Sutherland Investment Services attorneys review significant regulatory developments (including notable rulemakings and guidance from securities regulators) from the previous month that are of interest to retail broker-dealer and investment adviser firms.
FINRA Provides Update on Broker-Dealers’ Crypto Asset Activities
- On August 13, FINRA provided an update (Update) on broker-dealers’ and their affiliates’ crypto asset activities. The Update includes certain information FINRA collected through engagement with member firms via a crypto asset questionnaire it distributed to approximately 600 firms as well as its routine oversight. The Update outlines common types of crypto asset activities undertaken by FINRA members and their affiliates, highlighting several regulatory challenges and potential violations associated with these activities.
- FINRA identified several common types of crypto asset activities conducted by member firms, including: (1) acting as placement agents, wholesalers, or distributors for private placements of crypto assets or companies involved in crypto asset activities; (2) facilitating customer crypto asset transactions through affiliates or third-parties; (3) engaging in distributed ledger technology initiatives to enable transactions executed or executed and settled on permissioned blockchains, and (4) introducing institutional customers to third-party crypto asset custodians and crypto asset-related investment banking advisory services.
- FINRA also provided a non-exhaustive list of potential violations involving crypto asset related activities, including violations related to: (1) misrepresentations in communications with the public; (2) the failure to conduct due diligence on crypto asset related private placements; (3) the failure to disclose and/or supervise crypto asset related outside business activities and private securities transactions, and (4) the failure to establish anti-money laundering (AML) programs reasonably designed to detect and cause the reporting of suspicious transactions in crypto assets conducted or attempted by, at or through the broker-dealer.
Federal Judge Blocks Missouri’s Anti-ESG Rules
- On August 14, the US District Court for the Western District of Missouri found that Missouri’s anti-ESG rules for broker-dealers and investment advisers violate the First Amendment and are preempted by federal laws. The anti-ESG rules would have required broker-dealers and investment advisers to disclose to and obtain written consent from customers if their investment decisions or advice incorporated a social or other nonfinancial objective.
- The District Court held that the anti-ESG rules were preempted by the National Securities Markets Improvement Act of 1996 (NSMIA) and the Employment Retirement Income Security Act of 1974 (ERISA). The decision highlights the limits of states’ power to regulate broker-dealers and federally registered advisers that fall under the regulatory jurisdiction of the SEC and may have an impact on future state regulatory efforts.
FinCEN Issues Final Rule to Subject Certain Investment Advisers to Anti-Money Laundering Requirements
- On August 28, the Financial Crimes Enforcement Network (FinCEN) issued a final rule to add certain registered investment advisers (RIAs) and exempt reporting advisers (ERAs) to the definition of “financial institution” under the regulations that implement the Bank Secrecy Act (BSA).
- The rule will require RIAs and ERAs to: (1) implement a risk-based and reasonably designed AML/CFT program; (2) file certain reports, such as Suspicious Activity Reports (SARs), with FinCEN; (3) keep certain records, such as those relating to the transmittal of funds, and (4) fulfill certain other obligations applicable to financial institutions subject to the BSA and FinCEN’s implementing regulations, such as special information sharing procedures.
- The compliance date for the final rule is January 1, 2026.
FINRA Introduces a New Type of Exam: Thematic Reviews
- On September 3, FINRA released a podcast featuring members of its Examinations team, which details recent changes to its examination program, including the introduction of “thematic reviews.”
- “Thematic reviews” are a new type of exam that will focus on a business area or product where FINRA sees heightened risk or where FINRA believes that firms are not as focused as they should be. FINRA will use “thematic reviews” to compare and contrast firms’ controls and procedures across a particular product or area, which will allow it to more readily observe the “best practices’ that some firms are engaging in. FINRA notes that it intends to distill these “best practices” into future regulatory notices and guidance.
- FINRA describes “thematic reviews” as a “much earlier version of a sweep exam” and notes that a thematic review may result in a sweep if FINRA finds that groups of firms have not adequately addressed the targeted issue. Finally, FINRA notes that it has already engaged in “thematic reviews” regarding off-channel communications, net capital, communications with the public and broker-rankings.
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