Dual registrant regulatory roundup - June 2025

FINRA Proposes Revisions to SEC-Mandated Heightened Supervision Plans for Off-Channel Communications Settlements

• On May 8, FINRA published a blog announcing that it intends to modify the heightened supervision plans imposed as part of certain broker-dealers’ settlements with the SEC to resolve allegations that the firms failed to supervise and maintain records of employees’ business communications on unapproved channels, such as WhatsApp.

• Further insight about FINRA’s May 8 announcement can be found here.

SEC’s Director of the Division of Examinations Previews Divisions’ Approach to Ensuring Regulation S-P (Reg S-P) Compliance

• In a May 14 speech at FINRA’s Annual Conference in Washington DC, the SEC’s Acting Director of the Division of Examinations Keith Cassidy gave a speech regarding compliance with Reg S-P amendments set to take effect later this year. The speech focused on three aspects of the amendments: (1) the requirement to develop an incident response program that is reasonably designed to detect, respond to, and recover from unauthorized access to, or use of, customer information; (2) the requirement to establish, maintain, and enforce written policies and procedures reasonably designed to require oversight of third-party service providers; and (3) the requirement to notify affected individuals within 30 days whose sensitive customer information was, or is reasonably likely to have been, accessed or used without authorization.

• According to Acting Director Cassidy, in the coming months, the SEC’s Division of Examinations will host a series of tailored outreach events to help promote readiness and preparedness with the Reg S-P amendments. Further, examiners will start inquiring about firms’ preparations with the Reg S-P amendments prior to the compliance dates (December 3, 2025, for large entities and June 3, 2026, for smaller entities). Director Cassidy noted that the Division is not seeking to cite registrants for non-compliance, but instead plans to use data collected to identify trends or risks that can be addressed in future SEC guidance.

SEC’s Division of Trading and Markets Updates Guidance on Crypto Asset Custody by Broker-Dealers

• On May 15, the Staff of the SEC’s Division of Trading and Markets joined with FINRA’s Office of the General Counsel to withdraw a July 2019, “Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities” (Joint Statement). The Joint Statement had responded to questions raised by market participants concerning the application of the federal securities laws and FINRA rules to the intermediation and custody of digital asset securities and transactions. The Statement generally created the impression that it would be difficult for a broker-dealer to custody crypto assets in accordance with certain requirements, including the Customer Protection Rule (Rule 15c3-3 under the Securities Exchange Act of 1934, as amended (Exchange Act)).

• On the same day that the Joint Statement was withdrawn, the SEC Division of Trading and Markets issued responses to FAQs related to crypto asset custody by broker-dealers, including compliance with the Customer Protection Rule. In general, the FAQs provide a pathway for the custody of crypto assets by broker-dealers by noting that a broker-dealer can establish “control” under Rule 15c3-3(c) over a non-certificated crypto asset by holding the asset in a “qualifying control location.”

SEC’s Division of Corporation Finance Issues a Statement on Protocol Staking Activities

• On May 29, the SEC’s Division of Corporation Finance (Division) issued a statement (Statement) expressing its view regarding whether certain protocol staking activities constitute securities and therefore are subject to the federal securities laws. Protocol staking refers to the process whereby investors allocate their cryptocurrency tokens to a blockchain network. The primary objective is to receive rewards when these staked tokens participate in the data validation process for the blockchain. The Statement addresses three types of staking: (1) self (or solo) staking, where owners maintain ownership and control of their crypto assets and cryptographic private “keys” at all times; (2) self-custodial staking, where owners grant their validation rights to a third-party node operator, but retain ownership and control of their crypto assets and private keys; and (3) custodial staking, in which a third party takes custody of the owners’ crypto assets and facilitates staking of the crypto assets on behalf of the owners.

• The Division, applying SEC v. W.J. Howey Co., stated that these three types of protocol staking activities (as they are described in the Statement), “do not involve the offer and sale of securities within the meaning of Section 2(a)(1) of the Securities Act of 1933 or Section 3(a)(10) of the [Exchange Act].” The Division noted that the Howey test looks at whether there is “an investment of money in a common enterprise premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.” The Division stated that with regard to each of the three staking activities referenced in the Statement, the “efforts of others” were “administrative or ministerial” efforts and not “entrepreneurial or managerial” efforts. Therefore, they did not meet the Howey test definition of an investment contract.

FINRA Proposes a Rule to Raise the Gift Limit in Rule 3220

• On May 29, FINRA filed a proposed rule change with the SEC to amend FINRA Rule 3220 (Influencing or Rewarding Employees of Others) (Proposed Rule). The Proposed Rule would result in three primary changes to Rule 3220.

• First, under the Proposal, Rule 3220 would be amended to increase the gift limit from $100 per person, per year to $250 per person, per year. Conforming changes would be made to the gift limit in FINRA Rules 2320 and 2341. Second, a new section would be added to Rule 3220 that would authorize FINRA staff to conditionally or unconditionally grant an exemption from any provision of the Rule for good cause. Third, the Proposal would incorporate past FINRA guidance on various interpretive issues as Supplementary Material to Rule 3220, including guidance related to: (1) gifts incidental to business entertainment; (2) valuation of gifts; (3) aggregation of gifts; (4) personal gifts (e.g., wedding gifts and bereavement gifts); (5) de minimis gifts and promotional or commemorative items; and (6) donations due to federally declared major disasters. 

• Comments will be due on the Proposal 21 days after it is filed in the Federal Register.