In a recent report released by the U.S. Financial Industry Regulatory Authority (FINRA), it has been revealed that approximately 70% of crypto asset-related communications reviewed during a targeted exam failed to comply with FINRA rules. This comprehensive examination, which took place in November 2022, scrutinized over 500 retail communications distributed or made available by FINRA member firms concerning crypto assets.
The primary objective of the examination was to assess these communications against FINRA Rule 2210, which mandates that broker-dealer communications with the public should provide a sound basis for evaluating the facts regarding any product or service discussed while prohibiting exaggerated, unwarranted, or misleading claims. However, the results were far from satisfactory.
Lack of Clarity
One of the significant issues identified during the review was the failure to clearly differentiate between crypto assets offered through third-party affiliates and those directly offered by the member firms. This lack of clarity potentially led to confusion among investors regarding the nature of the products and services being offered, causing concerns about transparency and informed decision-making.
Furthermore, the review uncovered instances where crypto assets were inaccurately portrayed. In some communications, crypto assets were compared to cash or cash-equivalent instruments without a solid basis for such comparisons. This misleading information could misguide potential investors and result in unintended consequences.
Unclear explanations
Adding to the challenges, there were cases where the explanations provided about how crypto assets functioned, including their core features and risks, were either unclear or misleading. This lack of clarity could pose significant risks to investors who may not fully understand the complexities of the crypto market.
Perhaps one of the most concerning findings was the discovery that some communications falsely suggested that certain crypto assets were protected by the Securities Investor Protection Corporation (SIPC) under the Securities Investor Protection Act (SIPA). This misleading information could give investors a false sense of security, potentially putting their investments at risk.
FINRA’s call for improvement
In response to these issues, FINRA has provided a set of “Questions for Consideration” and guidelines for ensuring a “Fair and Balanced Presentation” in crypto-related communications. The regulatory authority has called on firms to critically evaluate the content of their crypto communications, specifically looking out for unwarranted or misleading information.
The guidance issued by FINRA emphasizes the need for clarity and accuracy in presenting crypto assets to the public. Firms are urged to provide a fair and balanced presentation of the risks associated with crypto assets in their communications.
These findings highlight the challenges and potential risks associated with crypto-related communications in a rapidly evolving industry. Regulatory bodies like FINRA are playing a crucial role in ensuring that investors are provided with accurate and transparent information to make informed decisions in the crypto market.
As the crypto market continues to grow and evolve, the need for clear and accurate communication becomes increasingly important. The findings from FINRA’s examination underscore the importance of adherence to regulatory guidelines and the responsibility of firms to provide accurate and transparent information to investors. In a market known for its volatility and complexity, ensuring that investors are well-informed is paramount to its long-term success.
