The Financial Industry Regulatory Authority (FINRA), in a report dated January 23, 2024, released the results of a targeted exam from November 2022, indicating that around 70% of the 500 communications related to crypto firms and assets it reviewed potentially violate its Rule 2210 (Communications with the Public).
According to the report, broker-dealer communications should be fair and balanced according to the FINRA Rule 2210, prohibiting exaggerated, promissory, or misleading communication, a condition that the vast majority of communications between cryptocurrency firms and customers do not meet.
The United States brokerage regulator confirmed that it is not creating or advocating for new laws. It recommends a review of existing crypto communications in line with existing legislation for firms looking to effect necessary corrections.
While speaking on a podcast episode, Ira Gluck, FINRA Senior Director for Advertising Regulation, clarified the agency wants crypto enthusiasts and investors to know regulated brokers via the nature of their communications.
About the FINRA Report
In 2022, FINRA launched a new study into member firms actively communicating with retail customers about crypto assets and related services to evaluate their compliance with extant FINRA rules and regulations. The report is a breakdown of findings during the study.
Because the firms in question are FINRA member firms, the percentage of violations is staggering, with the regulator claiming a whopping 70% of reviewed communications included potential violations. FINRA did not identify the erring firms but published a list of questions for consideration to help observers understand where the violators went wrong.
The report also recommends that FINRA member firms consider the information in the report when developing or modifying their communication policies and procedures to comply with regulatory demands. The independent regulator also indicates that it may release more information regarding the findings from the study later.
What Are the Violations?
While FINRA did not expressly mention the affected firms or the (specific) context of their communications violations, the organization listed several questions to help observers understand the infractions and point erring members in the right direction regarding future communication.
The primary themes of the violations that contravene the FINRA Rule 2210 include the failure of crypto firms to properly distinguish between crypto assets offered by affiliates of a member and the FINRA member themselves, leading investors into making financial decisions with the wrong assumption.
The report also warned against false statements by member entities, including those worded to imply cryptocurrency assets functioned like cash or other equally liquid instruments. It also slammed misleading explanations of how cryptocurrencies work, noting how many statements from member entities fail to provide a sound basis for evaluating how crypto assets are issued and transferred.
In addition to the observations, the regulator listed some questions for crypto exchanges in the report to help them revamp their communication protocol to comply with extant laws.
The Report Underscores the Need for Better Crypto Communication
The recent report is not the first time a US regulator has called out cryptocurrency firms for their obscure and often misleading communication, especially with investors and customers. This worrying trend underscores an urgent need for better broker-client communication among crypto firms in the United States.
Recall that the FDIC recently issued cease and desist letters against Atmos Financial and four others for misrepresenting the state of their deposit insurance to customers by implying customer deposits are fully FDIC-insured—when they are not.
While most US regulatory agencies do not look too much into communications between firms and their customers, this FINRA report, alongside the recent FDIC press statement, indicates that might become necessary in the future, as the non-transparent communication tactics by crypto firms are genuinely impactful on US crypto investors.
We don’t expect any repercussions for the erring firms or enforcement attempts from the agency concerning the alleged violations from the crypto firms because of the brokerage regulator’s structure. Although the government supports FINRA, it is ultimately an autonomous organization without the same enforcement authority as the SEC or CFTC.
