At the 2019 SIFMA Compliance and Legal Society’s New York Regional Seminar, industry panelists along with senior officials from the SEC and FINRA addressed a range of topics including Regulation Best Interest (or “Reg BI”), cryptocurrency and cannabis. Seminar highlights and takeaways include:
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Reg BI: In advance of the June 30, 2020 deadline, member firms should expect OCIE and FINRA examiners, starting as early as the end of 2019, to ask firms about plans to comply with the enhanced obligations under Reg BI. Those obligations include the requirement that firms develop policies and procedures to demonstrate compliance with the new standards of conduct for retail client interactions.
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Cryptocurrency: One of the largest challenges in the cryptocurrency space has been the rapid pace of advancements in digital asset technology. Firms are focused on keeping pace with these advancements in operational technology and updates to regulations, which tend to lag market changes. In particular, firms highlighted issues presented by custody and execution of digital assets such as bitcoin futures contacts, and the conflict between the anonymity inherent in many cryptocurrencies and the firms’ obligations under the Bank Secrecy Act. In general, firms are waiting for the regulators to issue guidance or new rules to help navigate these complicated paths.
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Cannabis: As a potentially explosive industry for investors, firms have found that there is significant demand among investors for cannabis-related securities. In general, firms have applied penny stock-type restrictions to cannabis securities and only permit trades in listed cannabis funds and stocks, but unique challenges continue to arise on a case-by-case basis, including new clients that wish to deliver in cannabis securities that may otherwise be prohibited by a firm. In addition, anti-money laundering and know-your-customer obligations have led to many firms developing new policies specifically focused on cannabis. While many member firms have a general prohibition against accepting new customer funds derived from the marijuana industry, there are unique difficulties in determining whether a client’s wealth is closely related enough to cannabis to require a hard stop.
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Cash Sweep Programs: In light of the recent decisions by some firms to offer zero-commission trades, multiple speakers stated that the clarity of disclosures regarding cash sweeps, particularly related to fee structures, would be a focus in upcoming examinations.