FINRA recently released the results of its November 2022 targeted exam to review the practices of its member firms that actively communicate with retail customers concerning crypto assets and crypto asset-related services. As part of this targeted exam, FINRA reviewed over 500 such communications and identified potential substantive violations of FINRA Rule 2210 in approximately 70 percent of the communications. FINRA Rule 2210 requires that communications be fair and balanced and provide a sound basis for evaluating the facts regarding any product or service discussed. The Rule also prohibits claims that are false, exaggerated, promissory, unwarranted, or misleading, and prohibits the omission of any material fact if that omission would cause the communication to be misleading.
FINRA noted the following themes in the violations they identified:
- 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.
- Misleading statements about the extent to which certain Crypto Assets are protected by SIPC or under SIPA.
- Failure to clearly differentiate in communications between Crypto Assets offered through an affiliate of the member or another third party, and products and services offered directly by the member itself.
To address these items, FINRA provided several questions for firms to ask themselves regarding their policies and procedures:
- Do your firm’s Crypto Asset retail communications contain unwarranted or misleading content, such as language that overstates the safety of trading in Crypto Assets (e.g., stating or implying that Crypto Assets are “secured” by a trading platform, or “backed” by a clearing firm)?
- Do your firm’s retail communications concerning a Crypto Asset provide a fair and balanced presentation of its risks, such as:
- the speculative nature of the Crypto Asset (e.g., significant volatility)
- the lack of legal or regulatory protections (e.g., lack of SIPC protections)
- regulatory uncertainty concerning the Crypto Asset
- Do your firm’s retail communications concerning Crypto Assets clearly:
- state which products and services are offered specifically by the broker-dealer, and which are offered by an affiliate or other third party
- state the nature and extent of exposure to Crypto Assets provided by crypto-related assets offered through the firm
- forthrightly disclaim SIPC protection where it would not apply
HOW REGED CAN HELP
RegEd’s Enterprise Advertising Review solution is the industry’s leading enterprise solution, powered by advanced capabilities that integrate AI technology to automate and streamline marketing compliance review and speed time to market. By using RegEd’s Enterprise Advertising Review system and its AI-powered tools, firms can reduce the regulatory risk associated with communications with the public.
Two of the many features offered with Advertising Review are particularly relevant to the FINRA targeted examination on crypto communications: Lexicon Detection and SMART DisclosuresSM.
RegEd’s Lexicon Detection feature automatically flags problematic keywords and phrases using firm-defined business rules, reducing review times and allowing your advertising review personnel to focus on high-risk content. These lexicon rules are completely configurable by the firm. For example, as a result of this FINRA guidance you may determine to set up a lexicon rule to identify if an advertising submission uses general language regarding crypto assets, or more specific keyword phrases such as “backed by the clearing firm” or “secured by our trading platform.” Any such lexicon hits are flagged for the reviewer to address. We also offer a turnkey list of lexicon rules and keyword/keyword phrases built on industry best practices for a multitude of communication categories, including crypto assets.
SMART Disclosures SM
RegEd’s SMART Disclosures SM feature automates the validation of required disclosures, ensuring each user adheres to firm policy with ease and efficiency. SMART Disclosures SM identifies and validates the inclusion or absence of the firm’s required disclosures related to crypto assets. For example, if the firm required a disclosure regarding the speculative nature of the crypto asset, the system would identify the content pertaining to crypto assets and ascertain whether the “speculative” disclosure was included. Any such disclosure issues are flagged for the advertising review personnel to address. In addition, our SMART Disclosures SM system allows firms to manage, store and centralize all their advertising and regulatory disclosures, so that the entire organization will have access to the correct and most current disclosures.
RegEd is the market-leading provider of RegTech enterprise solutions with relationships with more than 200 enterprise clients, including 80% of the top 25 financial services firms.
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Trusted by the nation’s top financial services firms, RegEd’s proven, holistic approach to RegTech meets firms where they are on the compliance and risk management continuum, scaling as their needs evolve and amplifying the value proposition delivered to clients. For more information, please visit www.reged.com.