With the growth in the crypto asset market and increased interest in crypto assets, the potential harm caused by problematic communications has also increased, according to Ira Gluck, Senior Director, Advertising Regulation Department, FINRA.
Speaking during the FINRA’s ‘Unscripted’ Podcast episode, he said that in order to have enough information to evaluate a crypto asset investment or service, communications need to clearly describe its risks and features.
He mentioned that FINRA is concerned about how communications discuss the protections offered through the federal securities laws or FINRA rules, including SIPC coverage.
“There are no such protections for accounts held at crypto asset entities, and that’s why we want investors to understand when they’re operating through a regulated entity and when they are not,” he said.
“Customers can also be misled if the communication falsely states, or implies, that the SEC or FINRA has endorsed or guaranteed a particular crypto asset, he added.
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 on January 23 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.
“Before the sweep, we were seeing a non-compliance rate for crypto asset filings of about 40%, and that compares to about 8% for all products. So, given all those factors, we believed a targeted exam was the most efficient way to get some insights into how firms are using these communications and their relative level of compliance,” commented Gluck.
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.
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,” commented Amy Sochard, Vice President, Advertising Regulation Department, FINRA.
“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,” she said.
