FINRA Warning: Most Crypto Communications are in Violation of Rules
Commentary by Steven Lofchie
In a new report and news release updating targeted sweep examination findings that had begun in November 2022 concerning retail communication by member firms on crypto assets or crypto asset-related services, FINRA "identified potential violations ... in 70 percent of ... [the] communications it reviewed."
According to the report, the targeted sweep examinations focused on compliance with FINRA Rule 2210 ("Communications with the Public") which mandates that communications by broker-dealers be fair, balanced and provide a sound basis for evaluating products and services, while prohibiting false or misleading claims. Identified deficiencies include: (i) unclear differentiation between member-offered and third-party crypto assets, false implications, misleading comparisons, and inadequate explanations of crypto assets' features and risks; and (ii) misrepresentations regarding the applicability of federal securities laws and FINRA rules, and misleading statements about protections under the Securities Investor Protection Act.
The update posed a series of questions for firms to consider as they review and supervise their retail communications concerning crypto assets.
Commentary
Although the assertion was that 70% of crypto communications are violative of FINRA Rules, FINRA also said that most of the violations were connected to a handful of firms. This suggests that the problem is at those few firms, rather than an industry issue. It is also uncertain what FINRA intends by criticizing communications that were produced or sent by affiliates of FINRA members, as those might not be subject to FINRA Rules.