Cryptocurrencies and ICOs

Digital Assets

Last year, FINRA took several steps to engage with members regarding their current and planned activities relating to digital assets. These efforts included the issuance of Regulatory Notice 18-20, which encouraged firms to keep their Regulatory Coordinator informed if the firm, or its associated persons or affiliates, engaged, or intended to engage, in activities related to digital assets, including digital assets that are non-securities. Regulatory Notice 18-20 requested that firms provide these updates to Regulatory Coordinators until July 31, 2019. FINRA appreciates members’ cooperation over the past year and is encouraging firms to continue keeping their Regulatory Coordinators abreast of their activities related to digital assets until July 31, 2020.

FINRA Regulatory Notice 19-24 (July 18, 2019): FINRA Encourages Firms to Notify FINRA if They Engage in Activities Related to Digital Assets



FINRA issued an alert to warn investors to be cautious when considering the purchase of shares of companies that tout the potential of high returns associated with cryptocurrency-related activities without the business fundamentals and transparent financial reporting to back up such claims. According to the SEC, there is substantially less investor protection in cryptocurrency markets than in traditional securities markets, with correspondingly greater opportunities for fraud and manipulation. The SEC has issued investor alerts, bulletins and statements on initial coin offerings and cryptocurrency-related investments, including with respect to the marketing of certain offerings and investments by celebrities and others.

NASAA Reminds Investors to Approach Cryptocurrencies, Initial Coin Offerings and Other Cryptocurrency-Related Investment Products with Caution (January 4, 2018)
FINRA Investor Alert December 21, 2017: Don’t Fall for Cryptocurrency-Related Stock Scams
SEC Public Statement (December 11, 2017): Statement on Cryptocurrencies and Initial Coin Offerings by SEC Chairman Jay Clayton


(New) Securities Offering Reform for Closed-End Investment Companies

The SEC adopting rules that will modify the registration, communications, and offering processes for business development companies (“BDCs”) and other closed-end investment companies under the Securities Act of 1933. As directed by Congress, the SEC is adopting rules that will allow these investment companies to use the securities offering rules that are already available to operating companies. August 1, 2020 is the effective date for all aspects of the final rule, subject to the exceptions noted in the Release.

Securities Exchange Act Release No. 34-88606 (April 1, 2020): Securities Offering Reform for Closed-End Investment Companies (Final Rule)


Amendments to Nasdaq Rules 5705 and 5710 to Adopt a Disclosure Requirement for Certain Securities

The SEC approved a proposed rule change to amend Nasdaq Rule 5705(b)(1)(B) relating to Index Fund Shares and Nasdaq Rule 5710(d) relating to Linked Securities to require issuers of such Index Fund Shares or Linked Securities to include on each such product’s website a statement that the product seeks returns for a single day, and that, due to the compounding of returns, holding periods of longer than one day can result in investment returns that are significantly different than the product’s target returns. The disclosure would also direct investors to consult the prospectus for further information on the calculation of the returns and other risks associated with investing in this type of product.

Securities Exchange Act Release No. 34-85362 (March 19, 2019), 84 FR 11148 (March 25, 2019): Order Granting Approval of a Proposed Rule Change, as Modified by Amendment No. 2, to Amend Nasdaq Rules 5705 and 5710 to Adopt a Disclosure Requirement for Certain Securities


Alternative Mutual Funds

The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to inform you about features, and some potential risks, of alternative mutual funds.

SEC Investor Bulletin (February 3, 2017): Alternative Mutual Funds


Volatility-Linked Exchange-Traded Products

Volatility-linked exchange-traded products (ETPs) are designed to track Chicago Board Options Exchange Volatility Index (VIX) futures, rather than the VIX itself. For the reasons explained in the Notice, many volatility-linked ETPs are highly likely to lose value over time. Accordingly, volatility-linked ETPs may be unsuitable for certain retail investors, particularly those who plan to use them as traditional buy-and-hold investments. This Notice reminds firms of their sales practice obligations in connection with volatility-linked ETPs as discussed more generally in Regulatory Notice 12-03, including, without limitation, that recommendations to customers must be based on a full understanding of the terms, features and risks of the product recommended, sales materials must be fair and accurate, and firms must have reasonable supervisory procedures in place to ensure that these obligations are met.

• FINRA Regulatory Notice 17-32 (October, 2017):  FINRA Reminds Firms of Sales Practice Obligations for Volatility-Linked Exchange-Traded Products


Complex Products

FINRA published guidance to firms about the supervision of complex products, which may include a security or investment strategy with novel, complicated or intricate derivative-like features, such as structured notes, inverse or leveraged exchange-traded funds, hedge funds and securitized products, such as asset-backed securities. These features may make it difficult for a retail investor to understand the essential characteristics of the product and its risks.

Regulatory Notice 12-03 identifies characteristics that may render a product “complex” for purposes of determining whether the product should be subject to heightened supervisory and compliance procedures and provides examples of heightened procedures that may be appropriate.

• FINRA Regulatory Notice 12-03 (January 2012):  Heightened Supervision of Complex Products