In November 2022, the Financial Industry Regulatory Authority (FINRA) launched a targeted crypto asset sweep, reviewing more than 500 retail communications related to crypto assets from member firms.
In its review, FINRA found various violations of its Rule 2210, which requires fair and balanced communications from broker-dealers to the public, including “potential substantive violations” in about 70% of the communications. These violations included instances in which firms failed to differentiate between crypto assets offered directly by the firms and those offered through affiliates or other third parties, firms implying crypto assets functioned like cash, and firms comparing crypto assets to stock investments without providing a sound basis to compare “the varying features and risks of these investments.”
Following the review, FINRA released its annual oversight report, which included a new section on compliance for crypto business dealings. It notes, among other items, that “crypto asset-related retail communications reviewed by FINRA’s Advertising Regulation Department have had a non-compliance rate that is significantly higher than that of other products,” and that member firms should “beef up” written policies for due diligence processes related to crypto asset sales and trading. The report directs firms applying for crypto licensure with the organization to consider whether their business plans comply with existing U.S. Securities and Exchange Commission rules around custody and settlement.
FINRA also flagged the risks related to private securities transactions involving crypto in September 2023, when leaders of the agency’s Crypto Asset Investigations Team warned that broker-dealers should make sure they are thorough in reviewing and disclosing their representatives’ digital asset activity.
FINRA member firms should heed the organization’s guidance, including disclosing their representatives’ digital asset activity to customers, and fairly and clearly disclosing the features and risks of crypto investments.
