In a comprehensive review of crypto communications within the financial industry, the Financial Industry Regulatory Authority (FINRA) has uncovered potential violations in approximately 70% of cases, shedding light on a significant gap in adhering to investor protection guidelines.
The scrutiny was part of a targeted exam initiated by FINRA in November 2022, focusing on member firms actively engaging with retail customers in the digital asset space. The investigation, which aimed to evaluate compliance with FINRA Rule 2210 (Communications with the Public), revealed alarming trends.
According to FINRA, Rule 2210 mandates that broker-dealer communications with the public must be fair and balanced and provide a solid foundation for evaluating facts about any discussed product or service. Prohibiting false, exaggerated, or misleading claims, the rule also stresses the importance of disclosing material facts to prevent communications from becoming misleading.
The Alarming Lapses in Crypto-related Retail Communications
The review covered over 500 crypto asset-related retail communications from various firms, highlighting a concentration of potentially violative communications originating from a select few. Ira Gluck, Senior Director of the Advertising Regulation Department at FINRA, emphasized the critical need for transparency in communications within the rapidly expanding crypto market.
In an ‘Unscripted’ Podcast episode, Gluck stated:
With the growth in this market and increased interest in crypto assets, the potential harm caused by problematic communications has also increased. In order to have enough information to evaluate a crypto asset investment or service, communications need to clearly describe its risks and features.”
Key findings of the sweep pointed to substantive violations of Rule 2210, including the failure to distinguish between crypto assets offered through affiliates or third parties and those directly by the member. False statements suggesting crypto assets functioned like cash, comparisons without a basis, unclear explanations, and misrepresentations regarding federal securities laws were among the flagged issues.
Amy Sochard, Vice President of the Advertising Regulation Department at FINRA, stressed the importance of the update, urging firms to thoroughly review and supervise their retail communications concerning crypto assets. Any findings of significant potential violations will be subject to further review and possible referral to FINRA’s Enforcement Department. The report raises critical questions about the need for enhanced oversight in the rapidly evolving digital assets space.
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