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The Financial Industry Regulatory Authority (FINRA), a private regulator overseeing brokerage firms and exchange markets in the United States, has published a report on its member firms that found many communicated false statements about digital assets, such as unfounded comparisons with cash or stocks.

In a review of its member firms, FINRA found that 70% of communications about digital assets may have violated its rules to be fair and balanced. Its review of over 500 digital asset-related retail communications revealed that false and misleading statements, such as “false statements or implications that Crypto Assets functioned like cash or cash equivalent instruments,” were rife among its members.

Other “misleading statements or claims” included false or misleading comparisons of digital assets to other assets, such as stocks, and misrepresentations that federal securities laws or FINRA rules applied to digital assets, thus implying it would be a secure investment.

FINRA is a private American corporation that acts as a self-regulatory organization, overseen by the Securities and Exchange Commission (SEC), that regulates member brokerage firms and exchange markets. It began its targeted exam of member firms’ communications with customers in November 2022.

The exam reviewed written communications such as print ads, but also “anything from a 90-minute podcast by the firm or a 15-second spot during the Super Bowl,” said Ira Gluck, Senior Director of FINRA’s Advertising Regulation Department, during an ‘unscripted’ Podcast episode published the same day as the report.

She went on to note that “with the growth in this market and increased interest in crypto assets, the potential harm caused by problematic communications has also increased… In order to have enough information to evaluate a crypto asset investment or service, communications need to clearly describe its risks and features.”

FINRA Rule 2210 relates to communications with the public and requires, among other things, that broker-dealer communications be fair and balanced and provide a sound basis for evaluating the facts regarding any product or service discussed.

The rule prohibits “claims that are false, exaggerated, promissory, unwarranted, or misleading and also prohibits the omission of any material fact if the omission, in light of the context of the material presented, would cause a communication to be misleading.”

As a result of its worrying findings, FINRA added some questions for its members to consider in future communications, including: does the firm’s communications about digital assets provide a fair and balanced presentation of its risks, including the extent to which protections provided by transacting through an SEC-registered entity will apply?; does the firm’s communications state which products and services are offered specifically by the broker-dealer, and which are offered by an affiliate or other third party?; and are technical terms associated with digital assets adequately explained?

“Our update on the targeted exam poses questions for firms to consider as they review and supervise their retail communications concerning crypto assets,” said Amy Sochard, Vice President of FINRA’s Advertising Regulation Department, who was also keen to point out that any continued violations of FINRA rules may lead to enforcement actions.

“Any findings of substantive potential violations are evaluated for further review and follow up, including considering whether to refer to FINRA’s Enforcement Department, as appropriate,” warned Sochard.

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