FINRA, the organization that regulates all of the broker-dealers in the United States, says a recent review of crypto communications indicates potential violations at a whopping 70% of the information reviewed. FINRA has not identified any firms that may be providing information that is in violation of the rules.
FINRA kicked off a Crypto Asset Communications Sweep in November of 2020 – as a greater number of firms are becoming active in the digital asset sector. Today’s report references Rule 2210, which governs regulated firms’ communications with the public. FINRA says that some of the communications reviewed incorporate false or misleading information about crypto as well as existing securities law.
FINRA Rule 2210 forbids statements that are “false, exaggerated, promissory, unwarranted or misleading.” It can also apply to ommissions.
FINRA states that it inspected over 500 “crypto asset retail communications” made by FINRA-regulated firms or those firms affiliated with FINRA members, and they viewed many potential violations of Rule 2210.
Ira Gluck, Senior Director of the Advertising Regulation Department at FINRA, said during a Podcast that with growing interest in crypto, the risk of harm from poor communications has risen.
“In order to have enough information to evaluate a crypto asset investment or service, communications need to clearly describe its risks and features.”
FINRA reviews all types of member firm communications, including written or broadcast information.
Findings of substantive potential violations are evaluated for further review, including a potential assessment by FINRA’s Enforcement Department, says Amy Sochard, Vice President of the Advertising Regulation Department at FINRA.
Key Findings of the Sweep 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.
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