BD Crypto Communications Not Up to Snuff: FINRA

A review by the Financial Industry Regulatory Authority of more than 500 crypto asset-related retail communications has found that 70% of them potentially violate FINRA Rule 2210 (Communications with the Public), according to a just-released report.

FINRA launched a targeted exam in November to review the practices of broker-dealers that actively communicate with retail customers concerning crypto assets and crypto asset-related services.

During the sweep, FINRA states that it reviewed more than 500 crypto asset-related retail communications, which included communications distributed or made available by FINRA member firms concerning crypto assets that were offered by or through an affiliate of the member or other third party.

“A handful of firms included in the exam distributed most of the potentially violative communications,” FINRA said.

Rule 2210 requires, among other things, that broker-dealer communications with the public be fair and balanced, and that they provide a sound basis for evaluating the facts regarding any product or service discussed.

The rule also prohibits claims that are false, exaggerated, promissory, unwarranted or misleading, as well as the omission of any material fact if the omission, in light of the context of the material presented, would cause a communication to be misleading.

Key Findings

The potential substantive violations of Rule 2210, FINRA said, include:

• Failure to clearly differentiate in communications, including those on mobile apps, between crypto assets offered through an affiliate of the member or another third party, and products and services offered directly by the member itself;
• False statements or implications that crypto assets functioned like cash or cash-equivalent instruments;
• Comparisons of crypto assets to other assets (e.g., stock investments or cash) without providing a sound basis to compare the varying features and risks of these investments;
• Unclear and misleading explanations of how crypto assets work and their core features and risks;
• Failure to provide a sound basis to evaluate crypto assets by omitting clear explanations of how crypto assets are issued, held, transferred or sold;
• Misrepresenting that the protections of the federal securities laws or FINRA rules applied to the crypto assets; and
• Misleading statements about the extent to which certain crypto assets are protected by the Securities Investor Protection Corporation under the Securities Investor Protection Act.

Ira Gluck, senior director of FINRA’s Advertising Regulation Department, said Tuesday during a FINRA Unscripted Podcast, “With the growth in this market and increased interest in crypto assets, the potential harm caused by problematic communications has also increased … [I]n order to have enough information to evaluate a crypto asset investment or service, communications need to clearly describe its risks and features.”