FINRA Fines Firm for Disclosure Deficiencies in Crypto Communications
Commentary by Gage Raju-Salicki
A firm settled FINRA charges for disclosure deficiencies in retail communications concerning crypto assets and crypto asset-related services.
According to the AWC, the firm distributed 33 "broadly available" communications—including website pages and social media posts—regarding crypto assets offered by its affiliate. FINRA highlighted that the affiliate required customers to maintain brokerage accounts with the firm in order to purchase crypto assets. FINRA stated that most of the firm’s communications "failed to prominently disclose" that the crypto assets were "not offered by [the firm], but were [instead] offered by [its] affiliate," which was not a registered broker-dealer or a member of FINRA or SIPC. FINRA also found that the firm used its own social media handle to promote crypto assets without disclosing that the crypto assets were provided by an affiliate.
In addition, FINRA found that many communications omitted the firm’s name and did not clearly indicate which products were offered by the firm. FINRA highlighted communications from the firm which stated, "our US customers can trade 41 popular cryptocurrencies," and "Open a #brokerage account today: stocks, ETFs, options, and crypto trading, among many more investment choices!" FINRA emphasized that these communications "could potentially confuse retail investors" regarding the identity of the service provider and the applicability of regulatory protections.
Further, FINRA determined that most of the firm’s communications failed to provide a "balanced treatment of risks and potential benefits," omitting that the crypto assets were "speculative and involved a high degree of risk." FINRA stated that the firm published a blog post promoting a particular crypto asset, claiming it was designed to solve "a number of significant obstacles faced by the blockchain industry" and "to facilitate extremely fast transaction speeds and scalability," yet the post omitted any mention of the potential risks involved.
As a result, FINRA said the firm violated FINRA Rules 2210 ("Communications with the Public") and 2010 ("Standards of Commercial Honor and Principles of Trade").
To settle the charges, the firm agreed to (i) a censure and (ii) an $85,000 fine.
Commentary
On the heels of the Department of Labor rescinding its prior guidance disavowing cryptocurrencies in 401(k) plans due to volatility, FINRA has taken the opposite tack. FINRA’s censure here is sensible on paper—certain disclosure requirements were not met, and that’s the end of the case.
It’s clear that FINRA is still keen on enforcing its rules with regard to digital assets, but this AWC also hints at some of the murkiness surrounding cryptocurrencies and broker-dealers at present. FINRA and the SEC withdrew their Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities on May 15 of this year, perhaps allowing broker-dealers to more easily carry cryptocurrencies rather than using affiliates (as seen in this AWC.)
If you are a broker-dealer, it’s recommended that you continue to make the necessary disclosures related to affiliates and entities.