FINRA BD Requirements for RegA+ & Digital Securities
The private markets are receiving a much updated revamp by the SEC which is having a major impact on registered FINRA Broker-dealer firms. Here are two (2) of the most common activities for which FINRA Broker-dealers (BD) are approached by companies. Most BD’s are not aware that in order to help companies raise capital utilizing these regulations, there is a registration they must first do with FINRA.
We went to the source that has been helping many FINRA Broker-dealers and put the responses in a simple way. Ken Norensberg, Managing Director, Luxor Financial provides the answers to which all BDs need to pay extra attention to make sure you are fully compliant.
Broker-dealers today have the ability to help companies that are using either Regulation D (RegD) or regulation A(RegA+). Now what they are not aware of is that in order to allow them to help companies with RegA+ they do need to be registered with FINRA. If that registration isn’t done, they are not allowed to proceed in offering those services. This process can take anywhere from 60 to 90 days or it could happen sooner. Most firms are not aware that when they take on a RegA+ client, they must apply to FINRA to represent them in the offering. This is done at the same time the company is filing their Form 1A with the SEC for their RegA+ offering.
Digital Securities are now becoming main street language and most Broker-dealers want to offer this to investors. Unfortunately, if they do not have FINRA approval for digital securities, it’s not a product they can represent or offer to investors. Digital Securities require registration. The process is like putting a full new member application, and it will take anywhere up to four (4) months. Your firm must file with FINRA for each of the exemptions you want to use for Digital Securities (RegD and or RegA+. Here is what your firm will be required to answer to FINRA in its application.
- You will need a detail business plan
- What entities are the holders of the “private keys” in the DLT network that would be required to gain access to the digital securities, cash-backed digital securities holdings or digital currency?
- Are multiple keys needed to gain access or is a single key sufficient?
- Who controls or has access to the DLT network where the assets are held?
- What happens in the event of a loss or destruction of assets (either due to fraud or technological malfunction) on the network?
- If the broker-dealer was to fail and is liquidated in a proceeding under the Securities Investor Protection Act of 1970, as amended, how would customers’ securities and funds be treated, and how would customers access their assets?
- In instances where firms have established partnerships with other firms to serve as their back-ups and to carry out critical functions in the event of emergencies, what type of access would those back-up firms have to the private keys?
- How will customers or the Securities Investor Protection Corporation (SIPC) trustee access the customers’ assets in the event of a defaulted broker-dealer? What parties will be involved, and what are their roles and responsibilities?
- How does the use or application of the DLT network affect the market risk, liquidity or other characteristics of the asset?
- What information is maintained using the DLT network?
- What will be deemed as the physical location of the firm’s records maintained on a node of a DLT network that may extend over multiple countries?
- What parties have control or access to the firm’s records? What are their rights, obligations and responsibilities related to those records, and how are they governed?
- What is the firm’s (and other participants’) level of access to the data, and in what format would it be able to view the data?
- How does the DLT network interact with the firm’s own systems for recordkeeping purposes?
- How would the records be made available to regulators?
- How will the firm’s traditional exception reporting, used to supervise transactions, be generated from a DLT network?
- How will the firm protect any required records from tampering, loss or damage?
- Clearance & Settlement?
- Anti-Money Laundering (AML) Procedures & Know Your Customer (KYC) Rules?
- Customer Data and Privacy?
- Trade & Order Reporting Requirements?
- Supervision & Surveillance of Transactions?
- Fees & Commissions?
- Customer Confirmations & Account Statements?
- Anticipated Customer Base?
- Facilities, Hosting?
- Licensed & Qualified Staff
As the market is evolving to provide more alternatives to companies and investors, FINRA Broker-dealers need to also make sure their licenses are up to date to be able to offer these updated alternatives. It’s not enough that you are registered with FINRA.
Thank you to Ken Norensberg, Managing Director of Luxor Financial, who provided this valuable information to assist Broker-dealers to stay compliant. Ken has been helping FINRA Broker-dealers manage these new registration requirements.
About Ken Norensberg & Luxor
Luxor Financial Group, Inc. a NY based Broker-Dealer Consulting Firm that specializes in setting up Independent Broker-Dealers. We are experts in New Member Applications, Continuing Membership Applications, Expansion Filings, FINRA and SEC Audits, Anti Money Laundering Reviews, Business Development and general compliance and business development services. www.luxorbd.com
Ken is a former Member of the FINRA Board of Governors. FINRA oversees the regulatory activities and business practices of over 4,500 Broker-Dealers, 163,000 Branch offices, 630,000 registered representatives and 3,500 employees and consultants with annualized revenues and a budget of approximately $800,000,000 (Eight hundred million dollars.)
The Board contends with many complex issues that affect large organizations from generating revenues, managing expenses, personnel, legal, regulatory, political and operational issues.
Additionally, Ken was a Member of the following committees and subcommittees:
- Regulatory Policy Committee
- Emerging Regulatory Issues (Subcommittee)
- Financial, Operations & Technology Committee
- Pricing (Subcommittee)
- Ex-Officio of the Small Firms Advisory Board (SFAB)