The Financial Industry Regulatory Authority (FINRA) has identified a staggering number of potential regulatory violations. In a targeted examination initiated in November 2022, FINRA reviewed over 500 crypto-asset-related retail communications from member firms. Findings released in January 2024 revealed that approximately 70% of these communications potentially violated FINRA Rule 2210, which governs communications with the public.
Rule 2210 is a cornerstone regulation that ensures fairness and balance in communications between brokers and dealers. It prohibits false, exaggerated, prescriptive, unjustified or misleading claims and requires that any communication provide a sound basis for evaluating the facts about any product or service discussed. The rule is critical to maintaining market integrity and protecting investors from misleading information.
The violations found by FINRA primarily involved misleading claims and comparisons regarding crypto assets. These include false suggestions that crypto-assets function as money or equivalent instruments, vague and misleading explanations of crypto-asset operations, and comparisons of crypto-assets to other assets, such as stocks or money, without solid basis. It should be noted that some communications falsely imply that crypto assets are protected by federal securities laws or FINRA rules, or misleadingly state the extent to which certain crypto assets are protected by the Securities Investor Protection Corporation (SIPC ).
This review is part of FINRA’s ongoing efforts to regulate the booming crypto market. This comes as a result of increased interest in crypto assets and the potential harm caused by problematic communications in this fast-moving market. The findings highlight the need for member firms to adhere strictly to regulatory standards, particularly in such a volatile and complex market as cryptocurrencies
FINRA’s report is more than just a compilation of compliance issues; it serves as a vital tool for member companies to improve their communication strategies. The high rate of non-compliance in crypto communications highlights the need for increased vigilance and compliance with regulatory standards. As the crypto industry continues to evolve, FINRA’s oversight and subsequent regulatory actions will play a critical role in shaping the cryptocurrency landscape and its integration into the broader financial system.
FINRA’s findings are a stark reminder of the crypto industry’s growing problems and the importance of strong oversight. The organization’s role may be further affected by an upcoming Supreme Court decision regarding the SEC’s use of in-house judges, which could have implications for FINRA’s own practices. This decision follows a 2023 decision by the Court of Appeals for the District of Columbia District against FINRA’s use of these judges.
In summary, FINRA’s report serves as a critical reminder of the challenges facing the crypto industry and the importance of maintaining high standards of regulatory compliance. As the crypto market continues to grow and attract investor interest, the role of regulators such as FINRA in ensuring market integrity and investor protection becomes increasingly important.
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