Tag: Company News

As we turn the page on 2022, we would like to highlight the following legal, regulatory and business matters that may affect you or your clients heading into the new year. As always, feel free to reach out to us should you have any questions.

Investment Advisers and Exempt Reporting AdvisersAnnual Amendment of Form ADV. Each registered investment adviser (RIA) and exempt reporting adviser (ERA) must file an annual updated amendment to its Form ADV. The annual amendment must be filed within 90 days of the adviser’s fiscal year-end.

Each RIA should also provide to each client an updated Form ADV Part 2A brochure and a summary of material changes to the brochure, if any (or simply a summary of material changes, if any, accompanied by an offer to provide the updated brochure).

Investment Adviser Registration Depository (IARD) Renewal Fees. Annual renewal fees for Securities and Exchange Commission (SEC) and state RIAs, as well as SEC ERAs, are due to the IARD by December 12, 2022.  Please visit www.iard.com for more information.

Form PF. An investment adviser must file Form PF if it (i) is registered or required to be registered with the SEC; (ii) advises one or more private funds; and (iii) has at least $150 million in private fund assets under management. Investment advisers must file Form PF on an annual basis within 120 days of the fund’s fiscal year-end.

Form 13H Amendments. All large traders that have made a Form 13H filing with the SEC are required to submit an annual filing within 45 days of the end of each calendar year.

SEC Matters

New SEC Investment Adviser Marketing Rules are Now in Full Effect. The SEC’s new marketing rules took effect on November 4, 2022. As of that date, RIAs are no longer permitted to choose to comply with the previous advertising and cash solicitation rules.

Broadly, the new marketing rules include updates to (i) the definition of an advertisement; (ii) generally prohibited advertising practices; (iii) the parameters for including testimonials, endorsements and third-party ratings; and (iv) the parameters for including performance results. The SEC also amended the books and records rules to require investment advisers to maintain records of certain advertisements, as well as amended Form ADV to require advisers to disclose their marketing practices.

On September 19, 2022, the SEC released guidance regarding how examinations will focus on the new marketing rules. Specific areas of review will include whether advisers have (i) adopted and implemented written policies and procedures designed to prevent violations of the new rules; (ii) a reasonable basis for believing they can substantiate material statements of fact in advertisements; (iii) complied with the new rules regarding performance advertising; and (iv) followed the amendments to the books and records requirements and accurately completed the new portion of Form ADV relating to the marketing rules.

The new portion of Form ADV was added to Item 5 of Part 1A.

SEC Proposes Significant Changes in Private Fund Regulation. On February 9, 2022, the SEC proposed new rules and regulations under the Investment Advisers Act of 1940 applicable to both SEC-registered and unregistered private fund advisers. The intent of the proposed rules is to require fund managers “to provide transparency to their investors regarding the full cost of investing in private funds and the performance of such private funds.”

See our full blog post with a summary of the proposed rules here. Generally, the proposed rules require annual audits and quarterly statements for RIAs (in lieu of the surprise examination option) and prohibit certain activities for SEC-registered and unregistered private fund advisers. Notably, one of the proposed prohibited practices involves the use of side letters that provide select fund investors with favorable terms. Under the proposed rules, these side letters would need to be disclosed to all prospective and current investors. The initial comment period for the proposed rules was set to end on April 25, 2022. The SEC later extended the comment period to June 13, 2022.

SEC Proposes Amendments to Form PF. On August 10, 2022 the SEC proposed amendments to Form PF in an effort to bolster the Financial Stability Oversight Council’s ability to assess systemic risk along with the SEC’s regulatory authority over fund managers and its investor protection efforts. Generally, the proposed amendments seek to (i) enhance reporting by large hedge fund advisers on qualifying hedge funds; (ii) enhance reporting on basic information about advisers and the private funds they advise; (iii) enhance reporting concerning hedge funds; (iv) amend how advisers report complex structures; and (v) remove aggregate reporting for large hedge fund advisers.

Notable to the digital asset space, the proposed amendments add a new sub-asset class for digital assets and include a definition for the term “digital asset.” The SEC specifically requested comments with respect to how digital assets should be categorized and disclosed. The comment period ended on October 11, 2022.

SEC Charges Advisory Firms for Custody Rule and ADV Violations. On September 9, 2022, the SEC issued a press release detailing charges against multiple investment advisers for failing to comply with SEC custody rules and/or failing to update the status of their audited financial statements on Form ADV. The firms ultimately agreed to pay civil penalties totaling more than $1 million. In detailing the charges, the SEC re-emphasized that RIAs managing private funds should ensure they are distributing audited financial statements to investors in a timely manner and updating their Form ADVs when audited financial statements are received. Specifically, the SEC noted that if an RIA checks “Report Not Yet Received” under Part 1A, Schedule D, Section 7.B.23 of its Form ADV, it must promptly file an amendment when the report is available. ERAs should also keep this in mind to the extent their funds are subject to an annual audit.

The charges follow an SEC settlement with another registered adviser in March for failing to maintain adequate policies and procedures regarding the custody rule and failing to deliver audited statements in a timely manner. RIAs managing private funds should review their policies and procedures to confirm they are currently compliant.

SEC Proposes New Requirements for Outsourced Services. On October 26, 2022, the SEC proposed new rules for RIAs that prohibit outsourcing certain functions without appropriate due diligence and monitoring of the service providers. The proposed rules apply to “covered functions,” which are functions or services that (i) are “necessary to provide advisory services in compliance with the Federal securities laws”; and (ii) “if not performed or performed negligently, would be reasonably likely to cause a material negative impact on the adviser’s clients or on the adviser’s ability to provide investment advisory services.” The proposed rules outline the due diligence procedures required before retaining a service provider to perform a “covered function” and require advisers to obtain reasonable assurances that third-party recordkeepers meet certain enumerated standards regarding their recordkeeping procedures. The SEC is currently accepting comments regarding the proposed rules until December 27, 2022.

Commodity Trading Advisors and Commodity Pool Operators

Annual Reaffirmation of CPO Exemption. Commodity pool operators (CPOs) and commodity trading advisors (CTAs) relying on an exemption from registration with the Commodity Futures Trading Commission (CFTC) are required to reaffirm their exemption eligibility within 60 days of the calendar year-end.

Forms CPO-PQR and CTA-PR. Registered CPOs and CTAs must file Form CPO-PQR and Form CTA-PR, respectively, using the NFA’s EasyFile system. Registered CPOs must file Form CPO-PQR on a quarterly basis within 60 days of the quarters ending in March, June and September, as well as within 90 days of the calendar year-end. Registered CTAs must file Form CTA-PR on a quarterly basis within 45 days of each quarter-end.

Advisers that are dually registered with the SEC and the CFTC may satisfy certain Form CPO-PQR filing requirements by filing Form PF by the Form CPO-PQR deadline.

CPO and CTA Annual Report Updates. Registered CPOs—including CPOs utilizing the CFTC Regulation 4.7 exemption—must distribute an Annual Report to each participant in each pool that they operate, as well as submit a copy of the Annual Report and key financial balances to the National Futures Association (NFA), within 90 days of the pool’s fiscal year-end. An independent certified public accountant must certify the Annual Report.

CPOs should also check the date of the most recent disclosure document of each pool they operate. CPOs are generally prohibited from soliciting clients with a disclosure document that has not been updated within the past 12 months.

CFTC and NFA Matters

CFTC Releases Enforcement Results for 2022. On October 20, 2022, the CFTC released its annual enforcement results for the fiscal year 2022. In total, the CFTC obtained orders imposing over $2.5 billion in payments and filed 82 enforcement actions. Notably, 18 of the CFTC actions involved digital assets. The digital asset-related actions largely involved either unregistered exchange activity or untrue/misleading statements made in connection with digital assets. The CFTC has general authority over most digital asset derivative transactions and has broad anti-fraud authority over spot digital asset transactions. The CFTC’s Division of Enforcement has a task force specifically dedicated to digital assets, and we expect to see the CFTC continue to prioritize bringing regulatory actions in the digital assets space.

CFTC Finds DAO Liable as an Unincorporated Association. On September 22, 2022, the CFTC filed an enforcement action in the U.S. District Court for the Northern District of California charging a decentralized autonomous organization (DAO) with illegally offering retail commodity transactions in digital assets. The CFTC alleged the DAO solicited customers for its software protocol that allowed users “to open leveraged positions whose ultimate value was determined by the price difference between two digital assets from the time the position was established to the time it was closed.” The CFTC classified these transactions as retail commodity transactions that were unlawful since they did not take place on a designated contract market.

The founders of the protocol transferred the protocol from a limited liability company to the DAO and then touted the DAO’s ability to avoid regulation. However, the CFTC stated that the DAO and its members should nevertheless be liable based on the existence of the DAO as an unincorporated association. The CFTC also filed an enforcement action against the original LLC and its founders. Significantly, the enforcement action and order demonstrate the CFTC’s willingness to go after DAOs and their participants. Fund managers should keep this regulatory risk in mind when investing in decentralized finance (DeFi) projects involving DAOs.

Digital Assets Matters

FTX Fallout. On November 11, 2022, FTX Trading Ltd. and its affiliates (FTX) filed for Chapter 11 bankruptcy protection in Delaware. The bankruptcy sent shockwaves through the crypto industry not seen since the Mt. Gox collapse in 2014. We are actively working with our clients impacted by FTX’s collapse to develop appropriate responses, from both a legal and a business operations standpoint. Although the collapse is a repeat of financial fraud as old as time rather than an indictment of blockchain technology and decentralization (it is arguably the opposite), it does shine a light on the need for clearer regulation. We continue to expect the SEC to emerge as the leading regulator of crypto exchanges and tokens and are monitoring potential legislative responses from Congress. Although there appears to be bipartisan support for certain reforms such as separating custody from trading platforms, unique challenges remain such as how to prevent non-US exchanges that may fall outside the US regulatory regime from interacting with US customers.

SEC Scales Up Crypto Enforcement Team. On May 3, 2022, the SEC announced it was nearly doubling its Crypto Assets and Cyber Unit in its Division of Enforcement from 30 to 50 dedicated positions. The expanded Crypto Assets and Cyber Unit is tasked with focusing on securities law violations related to crypto asset offerings, exchanges and lending products, as well as DeFi platforms, non-fungible tokens (NFTs) and stablecoins. The expansion of the SEC’s crypto enforcement arm is consistent with SEC Chair Gary Gensler’s sustained push to establish the SEC as crypto’s chief regulator of the asset class.

DOJ Charges Former OpenSea Employee in First Digital Asset Insider Trading Scheme. On June 1, 2022, the US Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation announced charges against a former product manager at OpenSea, the world’s largest NFT marketplace, for a scheme to commit insider trading. The OpenSea employee allegedly used confidential information regarding which NFTs were going to be featured on OpenSea’s homepage to invest ahead of the announcements. Interestingly, the DOJ elected to sidestep the issue of whether the underlying NFTs were securities by charging the defendant with wire fraud and money laundering.

SEC Charges Former Coinbase Manager with Insider Trading. On July 21, 2022, the SEC announced insider trading charges against a former Coinbase product manager and others for trading ahead of multiple announcements regarding tokens that were being added to the Coinbase trading platform. The SEC appeared to use the charges to regulate through enforcement by explicitly noting that many of the underlying tokens are securities. While the SEC has previously identified tokens as securities, those charges typically involved direct enforcement actions against an issuer. As SEC Division of Enforcement Director Gurbir Grewal noted, the case highlights the SEC’s focus on treating many tokens as securities regardless of label.

SEC Charges Influencer for Touting Token. On October 3, 2022, the SEC announced charges against Kim Kardashian for touting EthereumMax tokens on her Instagram account without disclosing that she was paid $250,000 to publish the post. Ms. Kardashian agreed to settle the charges, cooperate with the SEC’s ongoing investigation and pay $1.26 million in penalties, disgorgement and interest. In addition to reinforcing the SEC’s position that many tokens are securities offerings subject to federal securities laws, the charges and settlement were a highly publicized warning to celebrities and influencers to avoid promoting tokens on their social media accounts without disclosing compensation received from the token issuer.

Additional Compliance Matters

Verification of New Issues Status. Fund managers must conduct an annual verification of each account to ensure investors are eligible to participate in initial public offerings or new issues pursuant to FINRA Rules 5130 and 5131. While the initial verification requires affirmative representations by account holders, FINRA allows subsequent verifications to be completed using negative consent letters.

Annual Audited Financial Statements. RIAs that manage private funds are generally required to distribute audited financial statements to each fund investor within 120 days of each year-end.

Annual Compliance Review. RIAs should review their compliance program annually. The annual review should evaluate, at a minimum, the firm’s Code of Ethics, privacy policy, marketing policies, recordkeeping procedures, the Business Continuity plan, trading restrictions, trading practices, conflicts of interest, ERISA disclosures and compliance violation procedures.

Each RIA must also provide its investors with a copy of its privacy policy on an annual basis, even if no changes have been made to the privacy policy.

Form D Annual Amendments.  Form D filings for funds maintaining continuous offerings must be amended annually, on or before the anniversary of the Form D filing or the filing of the most recent amendment. When amending Form D, the fund should review the entire form and ensure all information is up to date.

Blue Sky Filings.  Fund managers should review their state blue sky filings to ensure they have met any applicable state renewal requirements.

If you require assistance with any of the above items, please do not hesitate to contact Kevin Cott at kevin@cottlawgroup.com. As always, we appreciate your continued business and support. From all of us at Cott Law Group, we wish you a happy and healthy New Year.

As we turn the page on 2021, we would like to highlight the following legal, regulatory and business matters that may affect you or your clients heading into the new year. As always, feel free to reach out to us should you have any questions.

Investment Advisers and Exempt Reporting Advisers

Annual Amendment of Form ADV. Each registered investment adviser (RIA) and exempt reporting adviser (ERA) must file an annual updated amendment to its Form ADV. The annual amendment must be filed within 90 days of the adviser’s fiscal year-end.

Each RIA should also provide to each client an updated Form ADV Part 2A brochure and a summary of material changes to the brochure, if any (or simply a summary of material changes, if any, accompanied by an offer to provide the updated brochure).

Investment Adviser Registration Depository (IARD) Renewal Fees. Annual renewal fees for Securities and Exchange Commission (SEC) and state RIAs, as well as SEC ERAs, were due to the IARD by December 13, 2021.  Please visit www.iard.com for more information.

Form PF. An investment adviser must file Form PF if it (i) is registered or required to be registered with the SEC; (ii) advises one or more private funds; and (iii) has at least $150 million in private fund assets under management. Investment advisers must file Form PF on an annual basis within 120 days of the fund’s fiscal year-end.

Form 13H Amendments. All large traders who have made a Form 13H filing with the SEC are required to submit an annual filing within 45 days of the end of each calendar year.

New Rules for New York Investment Adviser Representatives. Prior to February 1, 2021, New York did not require investment adviser representatives, principals, supervisors or solicitors (IARs) to register with the state. Effective as of February 1, 2021, IARs representing a New York RIA or SEC RIA with a New York place of business are required to register. Absent a waiver, IARs must either pass the Series 65 exam or a combination of the Series 7 and Series 66 exams within 2 years prior to filing for registration. IARs were generally required to register by August 31, 2021, absent certain exemptions.

SEC Matters

SEC Increases Qualified Client Thresholds. On June 17, 2021, the SEC adopted amendments to the definition of “qualified client” under the Securities Act of 1933. The amendments increased the dollar amount thresholds for the “assets-under-management” test and the “net worth” test, respectively, from $1 million to $1.1 million and from $2.1 million to $2.2 million. Adjustments to the net worth and assets-under-management thresholds are made every five years to account for inflation.

The amendments became effective on August 16, 2021, and do not apply retroactively to contractual relationships entered prior to the effective date. Advisers to separately managed accounts and/or private funds relying on Section 3(c)(1) of the Investment Company Act of 1940 should review and update their investment advisory contracts and/or offering documents to reflect the new thresholds. Further details regarding the amendments can be found here.

SEC Adopts Modernized Marketing Rule for Investment Advisers. On December 22, 2020, the SEC adopted amendments to Rule 206(4)-1 under the Advisers Act to create a single, consolidated rule (Marketing Rule) that replaced separate advertising and cash solicitation rules. The Marketing Rule represents a significant overhaul of adviser marketing rules with a stated goal of shifting to “principles-based provisions designed to accommodate the continual evolution and interplay of technology and advice.” Among other changes, the Marketing Rule: (i) expands the scope of which communications, materials and activities are considered “advertisements”; (ii) replaces the per se violations of the Advisers Act with a more flexible, principles-based approach (potentially granting advisers the ability to use marketing materials in certain circumstances that include specific recommendations, testimonials, third-party ratings, etc.); and (iii) allows the use of hyperlinks and layered disclosures under certain conditions.

Advisers should reevaluate all methods by which they currently communicate with current and prospective clients, including their current marketing materials, solicitation arrangements, recordkeeping practices and social media policies. The Marketing Rule became effective on May 4, 2021, but advisers have until November 4, 2022, to comply with the new rule. More information regarding the Marketing Rule and the current transition period can be found here.

Commodity Trading Advisors and Commodity Pool Operators

Annual Reaffirmation of CPO Exemption. Commodity pool operators (CPOs) and commodity trading advisors (CTAs) relying on an exemption from registration with the Commodity Futures Trading Commission (CFTC) are required to reaffirm their exemption eligibility within 60 days of the calendar year-end.

Forms CPO-PQR and CTA-PR. Registered CPOs and CTAs must file Form CPO-PQR and Form CTA-PR, respectively, using the NFA’s EasyFile system. Registered CPOs must file Form CPO-PQR on a quarterly basis within 60 days of the quarters ending in March, June, and September, and within 90 days of the calendar year-end. Registered CTAs must file Form CTA-PR on a quarterly basis within 45 days of each quarter-end.

Advisers that are dually registered with the SEC and the CFTC may satisfy certain Form CPO-PQR filing requirements when they file Form PF. In order to take advantage of this, such advisers must file Form PF by the Form CPO-PQR deadline.

CPO and CTA Annual Report Updates. Registered CPOs, including CPOs utilizing the CFTC Regulation 4.7 exemption, must distribute an Annual Report to each participant in each pool that they operate, as well as submit a copy of the Annual Report and key financial balances to the National Futures Association (NFA), within 90 days of the pool’s fiscal year-end. An independent certified public accountant must certify the Annual Report.

CPOs should also check the date of the most recent disclosure document of each pool they operate. CPOs are generally prohibited from soliciting clients with a disclosure document that is more than 12 months old.

CFTC and NFA Matters

Changes to Form CPO-PQR. As of the March 31, 2021, reporting date, the CFTC has revised and streamlined Form CPO-PQR. The revised Form CPO-PQR now has one schedule (Schedule A), and all reporting CPOs must file the revised Form CPO-PQR every quarter, regardless of size. The CFTC has also attempted to make the form more user-friendly.

CFTC Establishes Climate Risk Unit. On March 17, 2021, Acting CFTC Chairman Rostin Behnam announced the establishment of the Climate Risk Unit (CRU). The CRU will assess the efficacy of derivatives products in addressing climate-related risks in the financial system. As part of its mission, the CRU will represent the CFTC in industry discussions to reduce carbon emissions worldwide. The CRU also intends to facilitate dialogue regarding emerging climate risks, aid in the development of new “net-zero” products, support development of climate-related market risk data and evaluate effectiveness of other tools in accelerating products and services that promote climate-friendly practices.

New Notice Requirements for CPOs. Effective as of June 30, 2021, CPOs are subject to newly adopted NFA Compliance Rule 2-50 (Rule 2-50). Rule 2-50 requires CPOs to report the following occurrences to the NFA with respect to each commodity pool they operate: (i) the inability to fulfill its obligations to investors or an unplanned liquidation of the pool; (ii) the inability to meet margin calls; (iii) the inability to make redemptions in accordance with subscription agreements; (iv) freezing redemptions in preparation for ceasing operations; and (v) receiving notice from a counterparty that the pool is in default. All pools operated by a CPO—including pools relying on the CFTC Regulation 4.13(a)(3) de minimis exemption—are subject to Rule 2-50. The NFA released Interpretive Notice 9080 to provide examples of when notice is not required (e.g., if a CPO reasonably expects to meet the margin call within the time prescribed by its Futures Commission Merchant (FCM)).

NFA Updates Branch Office Inspection Requirement and Physical Examination Requirement. In light of the pandemic, the NFA released a notice to allow Members who were temporarily working from home to exempt their home office from the definition of a “branch office.” The notice, released in March 2021, was made permanent starting September 23, 2021. In NFA Interpretive Notice 9002, the definition of a “branch office” was revised to exclude “any location where one or more associated persons (APs) from the same household live or rent/lease (e.g., a shared or co-workspace).”

The exemption for home offices was not the only change caused by the pandemic. Through the end of 2021, Members are allowed to conduct their annual inspection of each branch office remotely. While the annual inspection is still required, the ability to do so virtually is in line with current public health policies. The NFA will also allow Members to conduct virtual inspections of branch offices in 2022, if appropriate given applicable risks.

Financial Industry Regulatory Authority (FINRA) Matters

FINRA Amends Rules 5122 and 5123 to Include Retail Communications. Effective October 1, 2021, FINRA amended Rules 5122 and 5123 to expand the filing requirements of broker dealers. Under the previous versions of the rules, member firms were required to file any private placement memorandum (PPM), term sheet or other offering documents used in connection with a private placement offering. Under the amended rules, such firms are also required to file any “retail communications” used in connection with private placement offerings (e.g., pitchbooks, slide presentations, fact sheets). The amended rules effectively formalize a common practice—most broker dealers have historically filed such retail communications simultaneously alongside the required PPMs or term sheets.

Digital Assets Matters

El Salvador Adopts Bitcoin as Legal Tender. On September 7, 2021, EL Salvador became the first country to adopt Bitcoin as legal tender. With the change, each company in El Salvador became required to accept Bitcoin as payment, and each citizen was gifted $30 in Bitcoin for utilizing the government’s e-wallet. President Nayib Bukele hoped the adoption of Bitcoin would stimulate the country’s economy in part by reducing transaction costs and increasing efficiency in international transactions. El Salvador remains the only country to adopt such a policy.

Rulemaking Petition Sent to SEC on Non-Fungible Tokens (NFTs). On April 12, 2021, Arkonis Capital, a registered broker dealer, submitted a rulemaking petition to the SEC requesting guidance on NFTs. In the petition, Arkonis posits scenarios under which an NFT may be deemed a “security”. They also argue that if an NFT relates to an existing asset and is marketed as a collectible with a public assurance of authenticity on the blockchain, it should not be considered a security.

Arkonis further states that should the SEC deem an NFT to be a security, the platform facilitating the sale and/or trading of such NFT could be required to register with the SEC as an exchange. Given these regulatory implications, Arkonis petitioned the SEC to publish guidance regarding when an NFT is a security and the resulting registration requirements. As of December 2021, the SEC has not released the requested guidance.

SEC Chair Gensler Discusses the Regulation of Cryptocurrency Under Existing Authorities. On September 14, 2021, Gary Gensler, the SEC Chair, testified before the Senate Banking Committee regarding the SEC’s authority to regulate the cryptocurrency market. During the testimony, Gensler responded to questions about gaps in the current regulatory regime by stating the SEC and the CFTC have “a great deal of authority” with regard to digital assets and “a great deal of clarity” in determining which digital assets meet the definition of a security. The gaps, he clarified, exist in the coordination amongst the different regulatory agencies—specifically, the SEC, the CFTC and the banking agencies.

Gensler also testified in October before the House Committee on Financial Services regarding cryptocurrency regulation. When asked about whether certain cryptocurrencies are securities, Gensler declined to comment on any specific token and reiterated that any token that passes the Howey Test is a security. Specifically, he stated “[T]he securities laws are quite clear. If you’re raising money from somebody else, and the investing public has a reasonable anticipation of profits based on the efforts of others, that fits within the securities law.”

First Bitcoin Futures ETF Launches. On October 18, 2021, ProShares launched the Bitcoin Strategy ETF, the first Bitcoin-focused exchange traded fund listed on a national exchange. Trading under “BITO”, the fund does not directly invest in Bitcoin but provides exposure to Bitcoin futures contracts. As of November 11, 2021, BITO had net assets of over $1.4 billion. Two other national Bitcoin futures ETFs launched shortly after the launch of BITO.

SEC Rejects Spot Bitcoin ETF. On November 12, 2021, the SEC rejected a proposed rule change to list shares of the VanEck Bitcoin Trust on the Cboe BZX Exchange. In its rejection, the SEC stated that the exchange did not meet its burden as a national securities exchange under the Securities Exchange Act of 1934 “to prevent fraudulent and manipulative acts and practices” and “to protect investors and the public interest.” The ruling is consistent with past statements from SEC Chair Gensler and other SEC actions demonstrating a preference for Bitcoin futures ETFs over spot Bitcoin ETFs.

Coinbase Files for Futures and Derivatives Trading. On September 16, 2021, Coinbase confirmed that it filed an application with the NFA to register as an FCM. As an FCM, Coinbase would be able to offer cryptocurrency futures and derivatives trading to U.S. persons on its platform. The application is still pending.

Ripple Lawsuit. In December 2020, the SEC sued Ripple Labs Inc. and two of its executives for allegedly conducting a $1.3 billion unregistered securities offering for XRP, its token. The SEC claims that XRP is a security because it was distributed by Ripple in a centralized manner and represents an investment in the company. Ripple disputes these claims, asserting that the SEC failed to release proper guidance on digital asset regulation and is attempting to utilize an outdated regulatory scheme on a novel industry. The Ripple case is ongoing, and its outcome could significantly affect the digital asset industry in the U.S.

SEC Fines Poloniex for Operating Unregistered Digital Asset Exchange. On August 9, 2021, the SEC announced that Poloniex LLC agreed to pay more than $10 million to settle charges of operating an unregistered digital asset exchange. The order states that Poloniex’s platform facilitated buying and selling digital assets, including digital assets that met the definition of a security. While operating the exchange, Poloniex instituted an internal review mechanism where it determined how likely certain digital assets were to be deemed securities. However, the SEC stated that Poloniex offered the ability to trade digital assets that were at “medium risk” under Poloniex’s policy and, as a result, certain digital assets meeting the definition of a security were available to trade on the platform.  This case reinforces the SEC’s authority over the digital asset industry, but the SEC did not go into detail on which specific digital assets met the definition of a security. 

CFTC Fines Kraken for Offering Margin Trading in the U.S. On September 28, 2021, the CFTC issued an order settling charges against Payward Ventures, Inc. d/b/a Kraken for illegally offering margined retail commodity transactions in digital assets and failing to register as an FCM. From June 2020 to July 2021, Kraken allowed customers to purchase digital assets (including Bitcoin) using margin. The CFTC found that “actual delivery” of the underlying assets did not occur, meaning the transactions met the definition of “retail commodity transactions.” Such transactions fall under the CFTC’s jurisdiction and are treated similarly to traditional futures contracts. The CFTC found the transactions to be unlawful because they did not take place on a designated contract market and Kraken acted as an unregistered FCM by soliciting and accepting the transactions.

BitMEX Moves All Operations Offshore as Remedial Measures in CFTC Action. On August 10, 2021, the CFTC announced that a U.S. district court entered a consent order against five companies that operated the BitMEX cryptocurrency derivatives trading platform. The order required BitMEX to pay a $100 million civil monetary penalty. As part of its remedial measures, BitMEX no longer maintains any substantive operations or business functions in the U.S. BitMEX also certified to the CFTC that anyone located in the U.S. is prohibited from accessing the platform. BitMEX’s remedial measures places it in line with other platforms offering digital asset derivative transactions solely outside the U.S.

Additional Compliance Matters

Verification of New Issues Status. Fund managers must conduct an annual verification of each account to ensure investors are eligible to participate in initial public offerings or new issues pursuant to FINRA Rules 5130 and 5131. While the initial verification requires affirmative representations by account holders, FINRA allows subsequent verifications to be completed using negative consent letters.

Annual Audited Financial Statements. RIAs that manage private funds are generally required to distribute audited financial statements to each fund investor within 120 days of each year-end.

Annual Compliance Review. RIAs should review their compliance program annually. The annual review should evaluate, at a minimum, the firm’s Code of Ethics, privacy policy, marketing policies, recordkeeping procedures, the Business Continuity plan, trading restrictions, trading practices, conflicts of interest, ERISA disclosures and compliance violation procedures.

Each RIA must also provide its investors with a copy of its privacy policy on an annual basis, even if no changes have been made to the privacy policy.

Form D Annual Amendments.  Form D filings for funds maintaining continuous offerings must be amended annually, on or before the anniversary of the Form D filing or the filing of the most recent amendment. When amending Form D, the fund must update the entire form.

Blue Sky Filings.  Fund managers should review their state blue sky filings to ensure they have met any applicable state renewal requirements. Note that issuers selling securities in New York in reliance on an exemption under Regulation D are required to file Form D and pay related filing fees through the Electronic Filing Depository. As of February 1, 2021, New York does not accept any Form 99 submissions and no longer requires issuers to file a notarized Form U-2.