Helping Clients Navigate Through ATS Registration Requirements and Challenges
Digital asset platforms, which are considered trading securities in the US, are subject to securities laws requiring such platforms to be registered as a national securities exchange (NSE) or fall within an exemption from an NSE registration.
One exemption from registration as an NSE allows a company to conduct a digital asset platform business if such company is registered as an ATS.
A lot of platforms providing a marketplace for digital tokens fall squarely within the definition of an ATS. Every ATS must still be registered with the SEC, provide multiple disclosures, implement security measures and comply with the federal reporting requirements, as well as state laws in each state where the ATS operates.
Specifically, Regulation ATS requires that every ATS must (i) register with the SEC as a broker-dealer, (ii) become a member of a self-regulatory organization (SRO), such as FINRA, (iii) file an extensive initial operating report (Form ATS) and (iv) have an ongoing compliance program to maintain the ATS and broker-dealer operations.
ATS registration process includes voluminous submissions to the SEC, including information about the traded securities, subscribers, operating procedures, etc. The ATS application is quite extensive and complex.
The scope of the application involves demonstrating to the SEC, among other things, a detailed technical description of the ATS operation procedures (e.g., custody, compliance, the process for booking orders, etc.), a description of the types of tokenized securities to be traded, description of users on the platform, capacity, integrity, and security of automated blockchain systems.
After registration, the ATS will have to comply with ongoing reporting requirements and other obligations, such as file quarterly transaction summaries and permit examination and inspection of the site, systems, and records by the SEC and FINRA in case of inspection or investigation. Also, as broker-dealers and FINRA members, ATSs platfroms are subject to strict standards of due diligence.
In addition, the SEC recently announced that it had voted to adopt amendments to Regulation ATS to require, among other things, stringent public disclosures of an ATS’ conflict of interests, risk of leakage of sensible information, procedures and operations, as well as additional safeguards dealing with confidential information.
Types of Tokenized Securities that Can Be Traded on ATS Platforms
- Tokenized real estate;
- Tokenized Venture Capital and hedge funds;
- Interests and shares in startups and established businesses;
- Fractionalized collectibles (classic cars, art, precious stones and metals);
- Digital art and NFTs in the form of securities; and
- Digitized intellectual property, royalties, music.
Guiding Clients Through Each Step of ATS Registration
One of the challenges for registering an ATS is that the SEC and FINRA currently lack sufficient experience and technical understanding of the digital assets and trading platforms, which requires back-to-back communication and meetings with FINRA throughout the registration process.
Having experience in digital assets, including security tokens, and traditional securities, we represent our clients before the SEC and FINRA throughout the whole ATS registration process to achieve the result. Our partners are in the constant process of communicating with the SEC and FINRA representatives regarding the most efficient ways of registering and operating an ATS.
Our services throughout ATS registration process (with the concurrent FINRA and broker-dealer registration) include:
- Preparation of FINRA New Member Application (Form NMA);
- Preparation of Form ATS for submission to the SEC and FINRA;
- Preparation a detailed business plan and other required operational and financial disclosures and procedures;
- Preparation of AML policies and procedures;
- Training or procurement of a chief compliant officer (COO);
- Preparation to and attending with client the pre-membership interview with FINRA;
- Communications with the SEC;
- Structuring relations with banks and clearing agents;
- Preparation of alternative self-clearing ATS operational structures;
- State registration and filings in all 50 states plus US territories;
- Preparation of other forms, filings, disclosures and procedures to register an operational ATS.
While the process of registering an ATS is complex and challenging, it is achievable with proper planning, structuring and communicating with the US regulators, generally within 6-12 months.
Filing of the ATS Application with FINRA & SEC
Our team, in consultation with the client, prepare and file (utilizing the required FINRA Gateway System) a complete application for FINRA membership, including Form BD (SEC Uniform Application for Broker-Dealer Registration), New Membership Application, Form U4s, Form BR(s) state securities department registrations, and all required ancillary applications for membership in organizations such as SIPC.
We will prepare, in consultation with the client:
- Written Supervisory Procedures (“WSPs”) appropriate to the proposed business of digital asset broker-dealer, including:
- The manner of operating a blockchain-powered ATS;
- Procedures governing entry of orders into the ATS;
- The means of access to the ATS;
- Procedures governing execution, reporting, clearance, and settlement of tokenized transactions effected through the ATS and supporting blockchain systems;
- Procedures for ensuring subscriber compliance with system guidelines; and
- ATS subscriber manual
- Business Continuity Plan (“BCP”);
- Anti-Money Laundering (“AML”) procedures;
- Pro-forma budgets; and
- Any other documents required or requested in connection with the Registrations.
Our team will also assist the client with preparing a business plan in the format required to satisfy the requirements of FINRA Rule 1014. The Client will seek approval for the following business lines:
- Private Placement of Tokenized Securities, Including Those Issued in Digital Form (Regulation A, Regulation D and Crowdfunding)
- Operator of Alternative Trading System (“ATS”) For Secondary Transactions in Securities, Including Those Issued in Digital Form
NMA Application Principal Licenses
- One (1) Series 24 licensed Chief Executive Officer (“CEO”)
- One (1) Series 24 licensed Chief Compliance Officer (“CCO”);
- One (1) Series 27 licensed Principal Financial Officer (“PFO / “FinOp”); and
- One (1) Series 27 licensed Principal Operations Officer (“POO”) throughout the course of the NMA.
Our team will prepare the owners and management team of the broker-dealer for the required FINRA membership interview(s) and will attend the membership interview meeting(s) with FINRA staff.
Resources for Registering/Operating ATS: