The U.S. Financial Industry Regulatory Authority (FINRA) has reported that approximately 70% of crypto asset-related communications reviewed in a recent targeted exam have failed to comply with its rules.
According to a recent report by the FINRA, the examination launched in November 2022 involved a thorough review of over 500 retail communications distributed or made available by FINRA member firms concerning crypto assets.
The primary focus was to evaluate these communications against FINRA Rule 2210, which mandates that broker-dealer communications with the public must provide a sound basis for evaluating the facts regarding any product or service discussed and prohibits exaggerated, unwarranted, or misleading claims.
“FINRA identified potential substantive violations of FINRA Rule 2210 in approximately 70 percent of the communications,” wrote the report.
Inconsistent Communication Practices
One of the primary issues identified was the failure to clearly differentiate between crypto assets offered through third-party affiliates and those directly offered by the member firms. This lack of clarity potentially led to confusion among investors about the nature of the products and services being offered.
FINRA also found instances where crypto assets were inaccurately portrayed. In some communications, crypto assets were compared to cash or cash-equivalent instruments, without a sound basis for such comparisons.
Additionally, there were cases where the explanations provided about how crypto assets function, including their core features and risks, were either unclear or misleading.
Some communications even falsely suggested that certain crypto assets were protected by the Securities Investor Protection Corporation (SIPC) under the Securities Investor Protection Act (SIPA), potentially giving investors a false sense of security.
FINRA’s Suggestion for Improvement
Following the reported issues, the FINRA provided a set of “Questions for Consideration” and guidelines for ensuring a “Fair and Balanced Presentation” in crypto-related communications.
FINRA suggested firms to question the content of their crypto communications. For instance, “Do your firm’s Crypto Asset retail communications contain unwarranted or misleading content?”
The report stated, “descriptions of Crypto Assets as liquid assets that are easily tradable,” or language that “overstates the safety of trading in Crypto Assets,” should be carefully scrutinized.
Regarding the presentation of crypto assets, FINRA’s report emphasized the need for clarity and accuracy. “Do your firm’s retail communications concerning a Crypto Asset provide a fair and balanced presentation of its risks?”
The guidance and questions aimed to direct firms towards more transparent, informative, and compliant company strategies in the dynamic and often complex world of crypto.
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