The SEC Wants to Friend You, FinTech
If you can’t beat them——join them? The traditional securities regulatory world seems to be undergoing something of a renaissance in its approach to regulation, at least in the context of trying to keep up with fast-changing innovation fueled by the FinTech sector. Federal securities laws dating from the 1930s are now getting a second look for new ways to modernize analytical approaches to regulating the capital markets. Particularly in the case of digital assets, an unprecedented “friendly listening tour” seems to have kicked off in earnest by the Securities and Exchange Commission (“SEC”) and its broker-dealer watchdog, the Financial Industry Regulatory Authority (“FINRA”).
Both the SEC and FINRA have been reaching out to FinTech industry participants to have open and candid dialogue. In late 2018, the SEC launched “FinHub,” a strategic resource for public engagement on FinTech-related issues and initiatives, with particular focus on innovations with digital assets: https://www.sec.gov/finhub. Local peer-to-peer meetings (P2Ps) with FinHub help to inform the SEC’s understanding of new financial technologies, while offering local FinTech communities the opportunity to speak directly with SEC staff to discuss specific issues or questions, or to give a presentation about their work.
Requests for P2P meetings can be made here: https://www.sec.gov/finhub-form
For aspiring crypto broker-dealers patiently awaiting guidance on their pending New Member Applications, FINRA recently released Regulatory Notice 19–24 as a reminder to existing member firms that FINRA really wants to be kept informed of any cryptocurrency-related activities that member firms have become involved with, while also explaining why FINRA is so interested. Not included anywhere in Regulatory Notice 19–24 however, was any mention of when to expect FINRA approvals of pending New Member Applications (approximately 40 in queue to date). Chatter in the CCO community is guessing that no movement will happen anytime soon, while the SEC and FINRA jointly work on expanding their digital assets learning curve and comfort levels. There’s still a lot of regulatory pondering going on.
While the current spirit of collaboration from regulators is a refreshing change of pace for weary CCOs, it likely won’t last forever. However, it does signal opportunities for the FinTech community to offer thought leadership towards problem solving for a new regulatory approach. Should your organization choose to step up for this challenge, a key consideration to keep in mind would be to first show a healthy respect for the issues that have always been important to the SEC and which can trigger “regulatory flexing” — issues like fraud, protection of retail investors, market manipulation, transparency of disclosure, and data security, among others. Show the SEC that you’ve put some serious thought into having these risks addressed because your organization has committed to having a solid compliance program in place with an appropriate internal control environment.
And always be mindful of the regulators’ “raison d’être” as protector of investors and markets; regulators will not issue opinions on the merits of innovation in nascent and emerging asset classes. Don’t expect regulatory feedback on the awesomeness of your technology, just as you wouldn’t consider asking for regulatory feedback on how to run your business model. That just isn’t the SEC’s thing. And while there have been a few recent SEC enforcement actions in the FinTech and digital assets space, the tone has been more moderate than heavy handed, with the door left open for continuing conversations. Developing a solid reputation and credibility through engagement with regulators will go a long way towards building a relationship of trust that can ultimately serve to bridge the gap between FinTech and traditional finance. It’s just a matter of time.
— Deborah Djeu, General Counsel & CCO, Lumina
