The U.S. Financial Industry Regulatory Authority (FINRA) has reported that a recent targeted examination revealed that approximately 70% of crypto asset-related communications failed to comply with its rules.
This examination, initiated in November 2022, involved a comprehensive review of over 500 retail communications that were distributed or made available by FINRA member firms concerning crypto assets. The primary objective was to assess these communications against FINRA Rule 2210, which stipulates that broker-dealer communications with the public must provide a solid foundation for assessing the facts related to any discussed product or service, while also prohibiting exaggerated, unwarranted, or misleading claims.
The report stated, “FINRA identified potential substantive violations of FINRA Rule 2210 in approximately 70 percent of the communications.”
Inconsistent Communication Practices
One of the main issues identified revolved around the failure to clearly distinguish between cryptocurrency assets offered through third-party affiliates and those directly provided by the member firms. This lack of transparency could have potentially resulted in confusion among investors regarding the true nature of the products and services being presented.
Moreover, FINRA also uncovered instances where cryptocurrency assets were inaccurately represented. In certain communications, these assets were compared to cash or cash-equivalent instruments, despite lacking a solid foundation for such comparisons.
Furthermore, there were instances where the explanations regarding the functionality of cryptocurrency assets, including their fundamental features and associated risks, were either unclear or deceptive.
In some instances, certain communications falsely implied that specific cryptocurrency assets were safeguarded by the Securities Investor Protection Corporation (SIPC) under the Securities Investor Protection Act (SIPA), potentially misleading investors into believing they had a higher level of security than was actually the case.
FINRA’s Suggestion for Improvement
In response to the issues that were reported, FINRA has introduced a set of “Questions for Consideration” and guidelines designed to ensure a “Fair and Balanced Presentation” in communications related to cryptocurrencies.
FINRA has advised firms to critically assess the content of their communications related to crypto assets. For instance, they recommend asking questions like, “Do your firm’s retail communications about Crypto Assets contain unwarranted or misleading information?”
The report explicitly highlighted the importance of scrutinizing descriptions of Crypto Assets as “liquid assets that are easily tradable” or language that exaggerates the safety associated with trading in Crypto Assets.
In terms of presenting information about crypto assets, FINRA’s report stressed the necessity of clarity and accuracy. They suggest firms inquire, “Do your firm’s retail communications regarding a Crypto Asset provide a fair and balanced representation of its associated risks?”
These guidelines and questions are intended to guide firms toward adopting more transparent, informative, and compliant strategies within the ever-evolving and intricate realm of cryptocurrencies.
