In January 2024, the Financial Industry Regulatory Authority (FINRA) reported a staggering rate of potentially inaccurate and misleading information in broker-dealer crypto asset communications. The Regulator revealed that approximately 70% of communications sampled in their sweep contained “potentially substantial violations” of its rules on communications with the public, including, among other things, “false statements or implications that crypto assets functioned like cash or cash equivalent instruments” and “unclear and misleading explanations of how crypto assets work.”
In November 2022, FINRA launched a targeted exam where it reviewed more than 500 crypto asset-related retail communications for compliance with FINRA Rule 2210, including crypto communications made by a member firm through an affiliate of the member or a third party. Rule 2210, which governs broker-dealer communications with the public, prohibits retail communications from making false, exaggerated, promissory, unwarranted or misleading claims, omitting material information and not providing a sound basis to evaluate any product or service mentioned.
The potential violations found by FINRA primarily involve making inaccurate, misleading and unbalanced statements and claims regarding crypto assets. Such statements and claims include not clearly distinguishing which crypto assets are offered through the broker-dealer versus an affiliate or third party, making unsubstantiated comparisons of crypto assets with other assets, like stock investments or cash, without a sound basis, and not clearly stating the significant risks associated with trading crypto assets, such as their speculative nature, volatility and lack of regulatory protections. Notably, some communications did not prominently disclose that SIPC protections apply only to certain cash and securities held by a broker-dealer and not to crypto assets that do not qualify as SIPA “securities”.
The full report and key findings by FINRA can be found here.
LEGAL TOKENS
This sweep by FINRA underscores ongoing efforts by regulators to monitor the crypto market as crypto assets become an increasingly mainstream part of broker-dealer product offerings. We advise that broker-dealers review their communications to ensure that they contain sufficient information for an investor to evaluate a crypto asset investment or service and its risks and features. Broker-dealers that offer crypto assets should also review their policies and procedures and compliance trainings on communications with the public to ensure that they align with FINRA’s findings.
