Launched in November 2022, the exam focused on member firms actively communicating with retail customers about crypto assets, according to a press release by the self-regulatory organization.
More than 500 communications were scrutinized for compliance with FINRA Rule 2210, which mandates fair, balanced, and factual broker-dealer communications.
Violations observed included failure to differentiate between crypto assets offered by affiliates and those offered directly, false claims about crypto assets functioning like cash, and misleading statements about federal securities laws or FINRA rules applying to crypto assets.
Ira Gluck, senior director at FINRA’s Advertising Regulation Department, emphasized the need for clear descriptions of risks and features in light of increased market interest in crypto during a podcast.
“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,” Gluck said. “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.”
Gluck used the example of communications being distributed to brokerage clients or involving cross-marketing of brokerage products and services along with the crypto asset offering, with some firms requiring customers to have a brokerage account to transact in crypto assets even when the crypto is traded through an affiliate or a third party.
“This nexus of brokerage clients or brokerage activities often resulted in communications that needed to comply with FINRA Rule 2210,” Gluck said.
The exam’s review period spanned from July 1, 2022, through Sept. 30, 2022, according to Gluck, with other key findings including:
- Unclear and misleading explanations of how crypto assets work and their risks;
- Omission of clear explanations of how crypto assets are issued, held, transferred, or sold; and
- Misleading statements about the extent of protections for certain crypto assets.
FINRA urged firms to review and supervise their retail communications concerning crypto assets, with potential violations evaluated for further action, including referral to its Enforcement Department. The report emphasized the evolving crypto market and importance of accurate and transparent communication as retail investor participation continues to grow.
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- Source: https://cryptoinfonet.com/regulation/finra-report-identifies-violations-in-crypto-communication/
