FINRA Finds Many Potential Violations in Review of Crypto Asset Communications
The Financial Industry Regulatory Authority (FINRA) was formed in July 2007 to regulate brokerage firms doing business with United States investors. FINRA is overseen by the U.S.
Securities and Exchange Commission (SEC) and can write rules and examine for and enforce compliance with those rules and federal securities laws.1
FINRA registers broker-dealer personnel and provides information to the investing public on those broker-dealers through FINRA BrokerCheck.2 As part of the organizations surveillance function in November 2022 FINRA launched an examination into the communication practices of certain members firms that actively communicate with retail customers concerning crypto assets and crypto asset-related services.
The results of that examination of more than 500 crypto-asset retail communications were released in January with the agency finding violations in 70 percent of the materials reviewed.3
Compliance with FINRA Rule 2210 was of particular interest during FINRA’s examination. Rule 2210 requires, in part, 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.”4
Rule 2210 further “prohibits claims that are false, exaggerated, promissory, unwarranted or misleading, and prohibits 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.”5
FINRA’s Advertising Regulation Department routinely reviews written communications, print ads in newspapers, product brochures, podcast materials and even Super Bowl commercials.
“With the growth in this market and increased interest in crypto assets, the potential harm caused by problematic communications has also increased … In order to have enough information to evaluate a crypto asset investment or service, communications need to clearly describe its risks and features,” said Ira Gluck, Senior Director of FINRA’s Advertising Regulation Department during an ‘Unscripted’ podcast on January 23.6
The potential substantive violations7 of FINRA Rule 2210 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;
• Other false or misleading statements or claims regarding crypto assets;
• 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.
Violations uncovered during FINRA’s examination are being reviewed and any substantive potential violation will be referred to FINRA’s Enforcement Department if deemed appropriate.
Excellence in Securities Litigation Representation
Your defense against broker mistakes that occur before taking corrective action relies on an experienced attorney. The securities attorneys at the Law Offices of Peter C. Rageas, P.C. have more than twenty years of experience in Securities and FINRA Litigation. We take pride in representing investors who have suffered financial losses due to broker negligence holding them responsible and recovering losses while protecting your rights.
If you have questions about how your financial accounts and investments are being managed, call our Michigan Securities Law Firm and speak with an attorney today.
____________________________
1 About FINRA
Link: https://www.finra.org/about
2 FINRA BrokerCheck
Link: https://brokercheck.finra.org/
3,4,5,6,7 FINRA Publishes Crypto Asset Communications Sweep Update, 1/23/2024
Link: https://www.finra.org/media-center/newsreleases/2024/finra-publishes-crypto-asset-communications-sweep-update