Blockchain Legal Resource

FINRA, the self-regulatory organization overseeing the US broker-dealer industry, recently announced two items of interest for broker-dealers offering crypto asset securities. On January 9, 2024, FINRA published its 2024 Annual Regulatory Oversight Report, which includes a detailed section for broker-dealers conducting a crypto asset business. Then, on January 23, 2024, FINRA published a report detailing the results of a targeted sweep examination on customer communications involving crypto assets, finding potential substantive violations of FINRA Rule 2210 in approximately 70 percent of surveyed communications.

The 2024 oversight report highlights a series of compliance issues for broker-dealers transacting in crypto assets. For example, the report highlights the need for the broker-dealer’s FINRA membership application to reflect the full scope of its crypto business. The report urges broker-dealers to establish written policies, procedures and controls for crypto regarding topics such as due diligence, trading, custody and compliance with law. In particular, the report highlights ensuring that a firm’s anti-money laundering program contemplates crypto. FINRA further urges broker-dealers to test for potential weaknesses in cybersecurity controls for any crypto asset-related business lines, and that firms conduct adequate surveillance on crypto transactions and customer communications.

The January 23 report presents FINRA’s finding from a November 2022 sweep of approximately 500 retail customer communications. FINRA observed the following communication practices that were inconsistent with FINRA Rule 2210:  

• Failure to clearly differentiate in communications, including those on mobile apps, between crypto assets offered through an affiliate of the broker-dealer or another third party, and products and services offered directly by the broker-dealer itself.
• 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 (such as stocks or cash) without providing a 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 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 the Securities Investor Protection Corporation (SIPC).

The January 23 report also offered a series of discussion prompts to help broker-dealers ensure statements and claims about crypto assets are not misleading, and that they present a fair and balanced discussion of potential risks.