The FINRA examination encompassed more than 500 retail communications related to crypto assets, originating from different firms, and brought attention to a concentration of communications that potentially violated regulations, including requirements to fully archive all such professional communications, as required by FINRA Rule 2210. Ira Gluck, who is the Senior Director of the Advertising Regulation Department at FINRA, underscored the essential requirement for clear and transparent communication within the swiftly expanding crypto market.
Speaking on an episode of the ‘Unscripted’ Podcast, Gluck expressed the following:
“As the market grows and interest in crypto assets increases, the potential harm caused by problematic communications also rises. To properly assess an investment or service involving crypto assets, it is crucial for communications to effectively outline their risks and features.”
The sweep’s significant findings revealed substantial breaches of Rule 2210. These violations entailed failures to distinguish between crypto assets offered by affiliates or third parties and those directly provided by the member. Additionally, false statements implying that crypto assets functioned similarly to cash, unjustified comparisons, unclear explanations, and misrepresentations regarding federal securities laws were among the identified issues.
Amy Sochard, Vice President of the Advertising Regulation Department at FINRA, emphasized the importance of the update. She urged firms to conduct thorough reviews and supervision of their retail communications regarding crypto assets. Any instances of significant potential violations will undergo further examination and may be referred to FINRA’s Enforcement Department. The report raises crucial concerns regarding the necessity for heightened oversight in the rapidly evolving digital assets field.
The potential violations of FINRA Rule 2210 identified in the examination include:
- Lack of clear differentiation in communications, including mobile apps, between crypto assets offered by affiliates of the member or third parties, and products and services offered directly by the member.
- False statements or implications suggesting that crypto assets function similarly to cash or cash equivalents.
- Other false or misleading statements or claims concerning crypto assets.
- Comparisons of crypto assets to other assets (such as stock investments or cash) without providing a valid basis to compare the different features and risks associated with these investments.
- Unclear and misleading explanations regarding the functionality, core features, and risks of crypto assets.
- Failure to provide a valid basis for evaluating crypto assets by omitting clear explanations regarding their issuance, storage, transfer, or sale.
- Misrepresentation of the extent to which federal securities laws or FINRA rules apply to crypto assets.
- Misleading statements about the level of protection certain crypto assets receive from the Securities Investor Protection Corporation in accordance with the Securities Investor Protection Act.
