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 Requests Comments on Arbitration Modernization
- On March 2, FINRA issued Regulatory Notice 26-06 (RN 26-06), requesting comments on potential changes to its arbitration rules, guidance, and processes as part of its broader rule modernization initiative. RN 26-06 seeks input on a wide range of issues, including forum selection, the six-year eligibility rule, pre-hearing options to dismiss, arbitrator qualifications and selection, arbitrator training, discovery rules and procedures, hearing oversight and efficiency, punitive damages, explained decisions, the Arbitration Awards Online database, unpaid awards, and the adjudication of Form U5 defamation claims.
- FINRA notes in RN 26-06 that it is seeking feedback as part of its review of “regulatory requirements and processes to administer a fair and efficient arbitration forum.” Comments are due to FINRA by May 1.
FINRA Board of Governors Advances Rule Modernization Initiatives
- At its March 4-5 meeting, FINRA’s Board of Governors approved several rule proposals as part of FINRA’s ongoing rule modernization efforts. Among other items, the Board approved proposals that would permit electronic delivery of regulatory requests, shorten qualification exam retake waiting periods, eliminate certain principal approval requirements related to late allocations of bulk investment adviser orders, and make targeted updates to certain arbitration procedures and operational rules.
SEC and CFTC Announce New Coordination Framework
- On March 11, the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) announced a Memorandum of Understanding (MOU) designed to enhance coordination between the agencies, with a focus on reducing duplicative oversight, improving information sharing, and supporting innovation across evolving product lines. In connection with the MOU, the agencies created a Joint Harmonization Initiative to advance coordinated oversight and promote regulatory clarity in areas of common regulatory interest, including the policymaking, examination, and enforcement functions of each agency.
- Under the MOU, the SEC and CFTC will work to build a framework in which the agencies coordinate seamlessly, reduce duplicative regulation, and provide clarity to market participants by, among other things: (1) clarifying product definitions through joint interpretations and rulemakings; (2) modernizing clearing, margin, and collateral frameworks; (3) reducing friction for dually registered exchanges, trading venues, and intermediaries; (4) providing a fit-for-purpose regulatory framework for crypto assets and other emerging technologies; (5) streamlining regulatory reporting for trade data, funds, and intermediaries; and (6) coordinating cross-market examinations, economic analyses, risk monitoring, market surveillance, and enforcement.
- More information about the MOU can be found in our recent legal alert.
The SEC Issues an Interpretive Release on Crypto Assets
- On March 17, the SEC issued an Interpretive Release (the Release) regarding the application of the federal securities laws to crypto assets and transactions involving crypto assets, based primarily on whether they are subject to an “investment contract” under the Howey test. The Release sets out a five-category framework for classifying crypto assets – digital commodities, digital collectibles, digital tools, stablecoins, and digital securities – and provides guidance on when a non-security crypto asset may become subject to, and later separate from, an investment contract. Under the framework, digital securities are subject to the federal securities laws, whereas digital commodities, digital collectibles, digital tools, and stablecoins are generally deemed not to be securities in and of themselves.
- The Release also notes that protocol mining, protocol staking, the wrapping of non-security crypto assets and certain airdrops do not involve the offer or sale of a security. In addition, the Release contains a statement endorsed by the CFTC that it will administer the Commodity Exchange Act consistent with the Release.
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