Recent findings from Finra's examination of cryptocurrency communications by brokerage firms indicate a concerning trend of potential regulatory violations.
The regulator's targeted examination program revealed that over two-thirds of the communications related to crypto assets from these firms might be infringing upon the rules for public communications.
The range of missteps uncovered by Finra in its scrutiny of over 500 distinct messages includes instances of inaccurate or deceptive statements, comparisons of products lacking appropriate context, and a failure to adequately explain the workings of crypto assets. Ira Gluck, the senior director of Finra’s Advertising Regulation Department, emphasized in a podcast that the growing market interest in crypto assets heightens the risk of harm from such problematic communications. He stressed the necessity for communications to comprehensively detail the risks and features of crypto assets to enable clients to make informed evaluations.
This scrutiny originates from a sweep examination initiative commenced in November 2022 by Finra. The objective was to assess the compliance of firms actively discussing crypto assets with clients, particularly in adherence to Rule 2210 concerning public communications. This rule aims to ensure that investors receive useful and objective information, aiding them in making educated investment choices. It mandates that communications be balanced, fair, and provide a solid foundation for clients to assess the facts about an investment product or strategy. Gluck noted that this rule encompasses all forms of client communications, ranging from traditional brochures to modern mediums like podcasts and TV advertisements.
Finra has identified that approximately 70% of the reviewed communications potentially contravene Rule 2210. To aid firms in ensuring their crypto-related communications meet compliance requirements, Finra has released a report with a series of evaluative questions. These questions focus on identifying unwarranted or misleading content, such as portraying crypto assets as highly liquid and easily tradable or suggesting they are supported by a clearing firm or trading platform. The regulator also cautions against comparisons that inaccurately suggest crypto assets offer benefits similar to those of gold or cash alternatives.
Additionally, Finra's fair-and-balanced test queries whether firms sufficiently describe the risks associated with crypto, including its speculative nature, the potential for fraud, and the absence of a robust regulatory framework overseeing the market.
Finra warns that issues in communications, like those documented in the recent report, could lead to enforcement actions. Amy Sochard, vice president of the Advertising Regulation Department, indicated that deliberations for some of the report’s subjects might already be in progress. She stated, “Any findings of substantive potential violations are evaluated for further review and follow-up, including considering whether to refer to Finra’s Enforcement Department." This serves as a clear signal to firms to meticulously review and align their communications with the established regulatory standards.
