A compliance review of brokerage firms’ cryptoasset communications found that about 70% of them may include regulatory violations, according to the U.S. Financial Industry Regulatory Authority Inc. (FINRA).
The self-regulatory organization reported the results of a compliance sweep that examined communications from brokers to retail investors, with a specific focus on whether they comply with rules that prohibit false, misleading, exaggerated claims in communications with investors.
Most of the materials FINRA reviewed contained potential violations, including false statements about cryptoassets, misleading descriptions about how cryptoassets work and their risks, and misrepresenting the investor protections that apply to crypto.
It also found that firms made comparisons between cryptoassets and traditional assets (such as equities and cash) without providing a sound basis for comparing their features and risks, and failed to clearly explain how cryptoassets are issued, held, transferred and sold.
“With the growth in this market and increased interest in cryptoassets, the potential harm caused by problematic communications has also increased,” said Ira Gluck, senior director with FINRA’s advertising regulation department, in a podcast released by the SRO on Tuesday.
“In order to have enough information to evaluate a cryptoasset investment or service, communications need to clearly describe its risks and features.”
According to Gluck, the sweep was prompted by the relatively high level of compliance issues that regulators previously observed in crypto communications versus other kinds of products.
“Perhaps most problematically, we saw instances of false or misleading statements, such as stating that cryptoassets were secure, protected or regulated,” he noted.
FINRA also saw statements implying or stating that Securities Investor Protection Corporation coverage applied to crypto investments, Gluck said, and which overstated the firm’s capabilities or experience regarding cryptoassets.
The SRO’s report on the compliance review’s findings also sets out guidance for firms to review and correct their own communications.
“[The report] poses questions for firms to consider as they review and supervise their retail communications concerning cryptoassets,” said Amy Sochard, vice-president, advertising regulation department, FINRA.