The United States Financial Industry Regulatory Authority (FINRA) has recently unveiled a troubling statistic – approximately 70% of retail communications regarding cryptocurrencies violate its rule on misleading claims. In a report, FINRA disclosed that these communications lacked the necessary information to accurately evaluate digital assets, specifically in terms of how they are issued, held, transferred, and sold. These disconcerting findings are the result of an examination initiated by FINRA in November 2022, aimed at crypto firms that actively engage with retail investors regarding crypto assets and related services.
During this examination, the financial regulator meticulously assessed over 500 communications circulated by member firms that discussed assets offered by affiliates or third parties. The objective was to evaluate compliance with FINRA Rule 2210, which prohibits false, exaggerated, promissory, unwarranted, or misleading communications. Additionally, the rule explicitly addresses the omission of crucial information that could deceive investors. It mandates broker-dealer communications with the public to be fair and balanced.
The examination conducted by FINRA raised several concerns, one of which was the absence of differentiation in communications between crypto products and services offered either through an affiliate or the member firm itself. The vast majority of the examined communications proved to be inconsistent with FINRA Rule 2210. The report highlighted that certain firms made false statements or implied that cryptocurrencies functioned similarly to fiat or equivalent instruments. Furthermore, some companies equated crypto investments to traditional stock investments without providing a solid foundation for comparing their distinctive features and risks.
To compound the issue, the firms examined by FINRA misled investors by suggesting that federal securities laws, the Securities Investor Protection Corporation (SIPC) under the Securities Investor Protection Act (SIPA), and FINRA rules provided the same protections for crypto assets. This misinformation misled investors into a false sense of security regarding their investments.
Obscure Explanations and Inadequate Risk Awareness
In its examination, FINRA discovered an alarming abundance of unclear and misleading explanations of how cryptocurrencies work. These explanations failed to properly address the core features and risks associated with investing in crypto assets. As a response to these concerning findings, the regulatory authority has recommended that fair and balanced communications should include information about the extreme volatility of cryptocurrencies, the potential for investors to lose their entire portfolio, and the extent to which designated protection agencies apply to crypto investments.
In light of these troubling findings, FINRA has urged member firms to consider the information provided in the report when developing or modifying their policies and procedures. These new measures should be designed to achieve compliance with relevant regulatory obligations, taking into account factors such as the firm’s size, business model, or current practices.
It is evident that a significant portion of retail communications regarding cryptocurrencies fail to meet the regulatory standards set by FINRA. This lack of compliance is concerning, as it exposes retail investors to misleading claims and inadequate information, potentially leading to detrimental financial consequences. It is crucial for firms operating in the crypto industry to prioritize transparency, accuracy, and investor protection in their communications, ensuring that retail investors have access to all the necessary information to make informed decisions about their investments.
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