FINRA Identified Rule Violations in 70% of Crypto Communications

A recent report by the Financial Industry Regulatory Authority (FINRA) has unveiled significant concerns regarding the communication practices of its member firms in relation to crypto assets, revealing potential regulatory violations in a striking 70% of reviewed materials. This disclosure emerged from the results of a targeted examination initiated by FINRA in November 2022, aimed at assessing how member firms engage with retail customers on crypto assets and related services.

The examination scrutinized over 500 retail communications from various firms, focusing on compliance with FINRA Rule 2210. This rule mandates that communications with the public must be fair, balanced, and provide a reliable foundation for evaluating the facts about any discussed product or service. It specifically bars any claims that are false, exaggerated, or misleading and calls for the inclusion of all material facts to prevent communication from being misleading.

The findings indicated a notable percentage of communications failed to meet these standards, raising concerns about the clarity and honesty of information being presented to consumers about crypto assets. Ira Gluck, Senior Director at FINRA's Advertising Regulation Department, expressed concerns over the growing market and interest in crypto assets, emphasizing the need for communications to adequately outline the risks and features of crypto asset investments or services.

The reported violations range from failing to distinguish clearly between crypto assets offered through affiliates or third parties and those offered by the members themselves, to making false statements about crypto assets functioning like cash or equivalent instruments. Other issues include misleading claims about the protections under federal securities laws or FINRA rules applying to the crypto assets, and unclear explanations of the core features and risks of crypto assets.

Amy Sochard, Vice President of the Advertising Regulation Department at FINRA, highlighted the rapid growth of the crypto asset market over the last decade and the expansion of product offerings and retail investor participation. She outlined that the sweep's findings should prompt firms to review and supervise their communications concerning crypto assets more carefully, with potential violations being subject to further review and possibly referred to FINRA’s Enforcement Department.

FINRA Press Release