Findings Show Potential Violations in 70% of Materials Reviewed
WASHINGTON—FINRA has identified potential violations of FINRA Rule 2210 (Communications with the Public) in 70 percent of crypto asset communications it reviewed, according to a report published today on the results of a targeted exam.
In November 2022, FINRA launched a targeted exam to review the practices of certain member firms that actively communicate with retail customers concerning crypto assets and crypto asset-related services. FINRA reviewed retail communications received from these firms for compliance with FINRA Rule 2210, which requires, among other things, that broker-dealer communications with the public be fair and balanced, and that they provide a sound basis for evaluating the facts regarding any product or service discussed. FINRA Rule 2210 prohibits claims that are false, exaggerated, promissory, unwarranted or misleading. The rule also prohibits the omission of any material fact if the omission, in light of the context of the material presented, would cause a communication to be misleading.
FINRA reviewed more than 500 crypto asset-related retail communications. This included communications distributed or made available by FINRA member firms concerning crypto assets that were offered by or through an affiliate of the member or other third party. A handful of firms included in the exam distributed most of the potentially violative communications.
“With the growth in this market and increased interest in crypto assets, the potential harm caused by problematic communications has also increased … [I]n order to have enough information to evaluate a crypto asset investment or service, communications need to clearly describe its risks and features,” Ira Gluck, Senior Director, Advertising Regulation Department, FINRA said during an ‘Unscripted’ Podcast episode published today. A transcript of the podcast is provided.
FINRA’s Advertising Regulation Department broadly reviews many types of broker-dealer and registered representative communications, including written communications such as a fund fact sheet, print ad in a newspaper or a product brochure, but also “anything from a 90-minute podcast by the firm or a 15-second spot during the Super Bowl,” Gluck noted during the episode.
“The crypto asset market has rapidly grown over the last decade, and product offerings and retail investor participation have expanded. Our update on the targeted exam poses questions for firms to consider as they review and supervise their retail communications concerning crypto assets. Any findings of substantive potential violations are evaluated for further review and follow up, including considering whether to refer to FINRA’s Enforcement Department, as appropriate,” according to Amy Sochard, Vice President, Advertising Regulation Department, FINRA.
Key Findings of the Sweep
The potential substantive violations of FINRA Rule 2210 include:
- Failure to clearly differentiate in communications, including those on mobile apps, between crypto assets offered through an affiliate of the member or another third party, and products and services offered directly by the member itself;
- False statements or implications that crypto assets functioned like cash or cash equivalent instruments;
- Other false or misleading statements or claims regarding crypto assets;
- Comparisons of crypto assets to other assets (e.g., stock investments or cash) without providing a sound basis to compare the varying features and risks of these investments;
- Unclear and misleading explanations of how crypto assets work and their core features and risks;
- Failure to provide a sound basis to evaluate crypto assets by omitting clear explanations of how crypto assets are issued, held, transferred or sold;
- Misrepresenting that the protections of the federal securities laws or FINRA rules applied to the crypto assets; and
- Misleading statements about the extent to which certain crypto assets are protected by the Securities Investor Protection Corporation under the Securities Investor Protection Act.
FINRA is a not-for-profit organization dedicated to investor protection and market integrity. It regulates one critical part of the securities industry—brokerage firms doing business with the public in the U.S. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.