FINRA Discovers Widespread Crypto Communication Violations in Recent Exam

The Financial Industry Regulatory Authority (FINRA) has revealed that it identified potential breaches of its disclosure rules in 70% of the crypto asset communications scrutinized during a targeted examination. Launched in November 2022, the examination specifically focused on member firms engaged in communicating with retail customers regarding crypto assets. Over 500 communications were examined for compliance with FINRA Rule 2210, which mandates fair, balanced, and factual broker-dealer communications.

Violations uncovered encompassed various issues, including the failure to distinguish between crypto assets offered by affiliates and those offered directly, making false claims about crypto assets functioning similarly to cash, and providing misleading information about federal securities laws or FINRA rules applicable to crypto assets.

Ira Gluck, Senior Director at FINRA’s Advertising Regulation Department, highlighted the importance of clear descriptions of risks and features, particularly amid the growing market interest in crypto. In a podcast, Gluck noted, "Before the sweep, we were seeing a noncompliance rate for crypto asset filings of about 40 percent, and that compares to about 8 percent for all products." The targeted exam was deemed an efficient approach to gain insights into how firms are utilizing communications and their overall compliance levels.

Gluck illustrated the challenge with communications distributed to brokerage clients or involving cross-marketing of brokerage products and services alongside crypto asset offerings. Some firms mandated customers to have a brokerage account even when transacting in crypto assets through an affiliate or third party, leading to communications needing to comply with FINRA Rule 2210.

The review period for the examination extended from July 1, 2022, through Sept. 30, 2022. Key findings included unclear and misleading explanations of how crypto assets operate and their associated risks, omission of clear explanations regarding the issuance, holding, transfer, or sale of crypto assets, and misleading statements about the extent of protections for certain crypto assets.

FINRA has urged firms to thoroughly review and supervise their retail communications related to crypto assets. Potential violations identified during the examination will be evaluated for further action, including referral to FINRA's Enforcement Department. The report emphasized the dynamic nature of the crypto market and underscored the importance of accurate and transparent communication as retail investor participation continues to rise.

By fLEXI tEAM