As might be expected, FINRA appears to be aligning itself with the SEC in its assertion of jurisdiction over investments that may not, at the end of the day, be deemed securities. Regardless of where the jurisdictional lines are ultimately drawn (through litigation or legislation or both), FINRA member firms should be on notice that they need to closely review the legal (i.e., registration) status of any investment that is not registered with the SEC before engaging in any marketing of the asset, even if that marketing is limited in scope. Member firms also need to pay attention to marketing ostensibly undertaken by their affiliates, because the marketing may – rightly or wrongly – be attributed to the member firm. Ponzi schemes, pyramid schemes, and significant liquidity issues are all in the headlines currently for the crypto asset class, and FINRA, like other securities regulators, does not want to be caught short by failing to protect public investors. These are the takeaways from FINRA’s announcement that is engaging in a crypto asset marketing sweep, Crypto Asset Communications | FINRA.org.
The sweep, announced by FINRA on November 14, 2022, targets FINRA member firm marketing practices with respect to crypto asset products and services. Member firms caught in the sweep will be required to produce all retail communications that were distributed by the member firm or its affiliates on its behalf, which refer to, relate to, or concern a crypto asset or a service involving the transaction or holding of a crypto asset.
Importantly, for purposes of the sweep, a “Crypto Asset” is defined as a security that is not registered under the Securities Act of 1933 and transferred through the system of a registered clearing agency. Except for this exclusion for registered securities, the definition of Crypto Asset includes all assets that are issued or transferred using distributed ledger or blockchain technology, including but not limited to, virtual currencies, coins, and tokens. For purposes of the sweep, retail communications include not just standard written marketing but also video and social media.
The exam is broad in scope. Member firms must create a tabular list of all retail communications coming within FINRA’s definition of a “Crypto Asset”, and disclose whether the communication was submitted to the FINRA Advertising Regulation Department for review, and whether the communication was approved by a registered principal of the FINRA member firm. The date of first use with the public must also be disclosed; and each Crypto Asset or service related to the asset must be identified.
The exam focuses not just on the member firm’s marketing; it also specifically focuses on marketing involving member firm affiliates. In this respect, the exam will require member firms to produce any contracts or written agreements between the member firm and any affiliate, concerning: (i) the member firm’s creation or dissemination of retail communications on behalf of the affiliate or services offered by the affiliate; and (ii) the affiliate’s use of member firm customer information to determine who receives retail communications.
The sweep’s scope also includes member firm internal procedures and written supervisory procedures. In this regard, member firms will be required to produce their policies and procedures for reviewing, approving, and recordkeeping their Crypto Asset communications, and produce to FINRA copies of training materials and compliance guidance.
The time period covered by the sweep is July 1 – September 30, 2022. The focus of this particularly sweep is on marketing but there will likely be other sweeps to come.
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