CUBE RegNews: 8th September

Greg Kilminster

Greg Kilminster

Head of Product - Content

HM Treasury issues reminder on frozen assets reporting

HM Treasury has issued a Financial Sanctions Notice reminding any firms or entities that hold or control funds or economic resources belonging to, owned, held, or controlled by a designated person (being a person subject to sanctions) that information about the funds or resources must be reported to the Office of Financial Sanctions by 10th November 2023.

Click here to read the full RegInsight on CUBE’s RegPlatform

FCA may delay aspects of crypto promotions regime

The FCA has signalled that in response to industry readiness it will consider giving cryptoasset firms more time to implement certain changes in advance of the new financial promotions regime which comes into force on 8th October 2023.

Firms could be given until 8 January 2024 to introduce features that require greater technical development, with the core rules still coming into effect in October.

The announcement was made on the back of research carried out with some registered cryptoasset firms to assess their preparations for the new regime. The findings of this research are summarised below:

  • Preparation discrepancies: Some firms were ill-prepared for the new regulations, primarily due to misconceptions about the broad definition of financial promotions. They focused on traditional advertising material but overlooked content on their websites and apps, potentially breaching the rules. 
  • Territorial scope and global entities: Regulations apply to financial promotions that can impact the UK, even if the firm operates internationally. Firms must clearly identify which entity in their group is responsible for UK promotions to avoid unintentional breaches.
  • Brand advertising: Firms planning to build brand awareness should review sponsorships and marketing materials for compliance. Many financial promotion rules do not apply to “image advertising,” but if content extends beyond defined categories, it may fall under these regulations.
  • Implementation planning: Successful firms typically had clear senior accountability and well-defined plans for implementation. They considered post-implementation activities, including handling increased customer enquiries and complaints.
  • Social media challenges: Using social media for promotions presents unique challenges. Firms must consider proposed guidance and potential risks, especially when working with influencers.
  • Incentive ban: Regulations prohibit offering incentives to retail clients to invest. Firms must review their product range for incentives and have plans to withdraw or restrict access to non-compliant products.
  • Risk warnings: Firms are in the process of determining the format and presentation of risk warnings. The best-prepared firms provided examples and mapped out the customer journey to meet requirements.
  • Appropriateness assessments: Firms should design appropriateness assessments with sufficient, non-binary questions to ensure customers understand material risks. Some firms intend to allow incorrect answers, but these should be carefully considered.
  • Client categorisation: Firms should not unduly influence customers’ self-categorisation. Consistency in category names is essential to prevent confusion and underplaying risks.
  • Professional client status: Recategorising retail clients as elective professional clients should meet stringent criteria. Firms must provide evidence, ensure clients fully understand risks, and avoid pressuring clients into this status.
  • Affiliate marketing: Firms working with affiliates to market their services must ensure compliance with financial promotion rules. They should be vigilant about the conduct of their affiliates to prevent illegal or poor practices.

The regulations aim to promote transparency and protect consumers in the cryptoasset industry. The FCA recommends firms intending to communicate or approve cryptoasset financial promotions should carefully consider the findings as part of their implementation plans. As part of this approach they have also issued a Dear CEO-type letter to cryptoasset firms outlining the research findings and next steps.

Click here to read the full RegInsight on CUBE’s RegPlatform

CFTC Commissioner calls for pilot program for digital asset markets

In a speech at the Cato Institute, Commodity Futures Trading Commission (CFTC) Commissioner Caroline Pham called for the agency to launch the first-ever US pilot program for digital asset markets.

Pham said that the CFTC’s current regulatory framework is not well-suited to address the risks and opportunities posed by digital assets, and that a pilot program would allow the agency to experiment with new approaches to regulation.

“A pilot program can create a safe framework for emerging technologies and market structures under our existing laws and regulations,” Pham said. “It is my hope that a pilot to test, gather data, and develop a pragmatic approach to digital assets and tokenization can ensure we continue to uphold our mandate of fostering open, transparent, competitive, and financially sound markets.”

Pham said that a pilot program for digital asset markets could address a number of challenges, including:

  • The lack of clarity about the regulatory status of digital assets.
  • The risks of fraud and manipulation in digital asset markets.
  • The need to protect consumers from the risks of digital assets.

Pham called on the CFTC to work with Congress, industry, and other stakeholders to develop a pilot program that would be effective in addressing these challenges.

“I believe that a pilot program is the best way to ensure that the CFTC is able to effectively regulate digital asset markets while also protecting consumers and promoting innovation,” Pham said.

The CFTC has not announced whether it will launch a pilot program for digital asset markets. However, Pham’s speech is an indicator that the regulator may be considering it.

Click here to read the full RegInsight on CUBE’s RegPlatform

CFTC resolves bitcoin fraud case

The Commodity Futures Trading Commission (CFTC) has announced that a federal court has ordered Mirror Trading International Proprietary Limited (MTI) to pay more than $1.7 billion in restitution to defrauded victims. MTI is a South African company that operated an unregistered commodity pool that purported to trade off-exchange, retail forex.

The CFTC found that MTI engaged in a fraudulent multilevel marketing scheme to solicit Bitcoin from people for participation in the commodity pool. The defendants misappropriated all the Bitcoin they accepted from the pool participants.

The order also permanently enjoins MTI from further violations of the Commodity Exchange Act (CEA) and imposes permanent trading bans in any CFTC-regulated markets as well as a registration ban against MTI.

Click here to read the full RegInsight on CUBE’s RegPlatform

CFTC fines three DeFi platforms for unregistered trading

Continuing in a similar vein, the CFTC has also fined three decentralised finance (DeFi) platforms for operating unregistered trading platforms that allowed US persons to trade digital asset derivatives.

The platforms, Opyn, ZeroEx, and Deridex, were charged with failing to register as swap execution facilities (SEFs) or designated contract markets (DCMs), failing to register as futures commission merchants (FCMs), and failing to adopt a customer identification program as part of a Bank Secrecy Act compliance program, as required of FCMs.

The CFTC also charged the platforms with illegally offering leveraged and margined retail commodity transactions in digital assets.

Each has paid a civil monetary penalty of $250,000, $200,000, and $100,000, respectively, and agreed to cease and desist from violating the Commodity Exchange Act (CEA) and CFTC regulations.

The CFTC’s enforcement action is a reminder that the agency is closely monitoring the DeFi space and will take action against those who violate the law. 

Click here to read the full RegInsight on CUBE’s RegPlatform

SEC issues risk alert to aid IA examination understanding

The Securities and Exchange Commission (SEC) has published a Risk Alert from the Division of Examinations which provides useful guidance into the examination process for investment advisers.

The main points from the document are as follows.

  • The Division uses a risk-based approach for selecting advisers to examine and determining the scope of examinations, adapting to changes in market conditions and regulatory requirements.
  • Technology is leveraged to collect and analyse industry- and firm-level data to identify risks.

Assessing Risks and Scoping Examinations:

A. Selecting Firms to Examine:

  • Reasons for selecting advisers for examination include risk characteristics, tips, complaints, referrals, and the Division’s annual priorities. 
  • Factors considered when selecting advisers include services provided, products recommended, compliance risk areas, and firm-specific risk factors.

B. Selecting Examination Focus Areas: 

  • The scope of an examination varies based on the firm’s business model, associated risks, and the reason for the examination. 
  • Core areas reviewed during examinations include custody of client assets, valuation, portfolio management, fees, expenses, brokerage, and best execution.

Selecting Documents to Request – Typical Information Requested:

  • The staff sends an initial request for information to advisers, which includes general information about the adviser’s business, compliance risks and policies, information on advisory trading activities, and data for compliance testing.

This Risk Alert stresses the SEC’s dynamic risk-based approach to examinations and the factors that influence the selection of firms for examination, as well as the scope and documents requested during examinations.

Click here to read the full RegInsight on CUBE’s RegPlatform