The Financial Industry Regulatory Authority (FINRA) found potential violations of FINRA Rule 2210 (Communications with the Public) in 70% of the crypto communications it reviewed, according to report published today on the results of a targeted examination.
In November 2022, FINRA launched a targeted examination to review the practices of certain member firms that actively communicate with retail clients about cryptoassets and cryptoasset-related services. FINRA reviewed retail communications received from these firms for compliance with FINRA Rule 2210, which requires, among other things, that broker-dealers’ communications with the public be fair and balanced and that they provide a sound basis for evaluating of facts about any product or service discussed.
FINRA Rule 2210 prohibits claims that are false, exaggerated, promissory, unjustified, or misleading. The rule also prohibits the omission of any material fact if the omission, in light of the context of the material presented, would result in a communication being misleading.
FINRA reviewed more than 500 retail communications related to crypto assets. This included communications distributed or made available by FINRA member firms regarding crypto assets offered by or through an affiliate of the member or other third party. A handful of companies included in the review distributed most of the potentially infringing communications.
FINRA’s Division of Advertising Regulations broadly reviews many types of broker and registered dealer communications, including written communications such as a fund prospectus, a print newspaper ad or product brochure, but also anything from a 90-minute podcast by the firm or a 15-second spot by during the Super Bowl.
Potential material violations of FINRA Rule 2210 include:
- Failure to clearly differentiate in communications, including those in mobile applications, between crypto assets offered through a member’s affiliate or other third party and products and services offered directly by the member itself.
- False statements or insinuations that crypto assets functioned as cash or cash equivalents.
- Other false or misleading statements or claims about crypto assets.
- Comparisons of crypto-assets with other assets (eg investments in stocks or cash) without providing a sound basis for comparing the different characteristics and risks of these investments.
- Vague and misleading explanations of how cryptoassets work and their key features and risks.
- Failure to provide a sound basis for valuing crypto assets by omitting clear explanations of how the crypto assets are issued, held, transferred or sold;
- Misrepresenting that the protections of federal securities laws or FINRA rules apply to crypto assets. and
- Misrepresenting the extent to which certain crypto assets are protected by the Securities Investor Protection Corporation under the Securities Investor Protection Act.