At the annual conference of the Financial Industry Regulatory Authority (FINRA) this week in Washington, DC, the officers and staff at the self-regulatory agency emphasized its extensive outreach with the industry in crafting rules, assessing their impact, and the patterns detected in exams, especially in the communications arena.

More specifically, to drive home the importance of ensuring member firms align client-facing communications in compliance with the rules, the speakers targeted many of their remarks around compliant communications by focusing specifically on cryptocurrency assets, offerings and trading.

Working with industry

Robert Cook, President and CEO of FINRA, and Eric Noll, Chair of FINRA’s Board of Governors and also the CEO of Stone Ridge Capital Partners LP, spoke about the 13 advisory committees that provide feedback on rule proposals, regulatory initiatives and industry issues. He noted that more than 160 industry members and 35 non-industry members serve on these committees.

As an example of industry input helping to shape a recently amended FINRA rule, Noll mentioned FINRA Rule 1880(b), which provides that the syndicate manager in a public offering of corporate securities must effect the final settlement of syndicate accounts within 90 days following the syndicate settlement date. FINRA had originally proposed a 30-day window before industry participants voiced their valid concerns.

The agency also made a rule change that enables individuals who choose to take continuing education after terminating their employment to maintain their registration with FINRA for five years, after hearing from parents and others needing this flexibility.

This gives those professionals five years in which to reregister with a member firm without having to requalify by exam or having to obtain an exam waiver.

Cryptocurrency and communications about them

Various speakers noted how the agency is handling its oversight of firms offering crypto products and services, pointing out that some brokers themselves are getting involved in crypto-related activities outside of their employment, which needs to be examined. (Is it an outside business activity or a private securities transaction?)

Risk they cited with crypto assets included whether the business’s compliance and legal team adequately understood the nature, features and risks involved in these product offerings and how they are being used. They directed professionals to consult FINRA’s Crypto Hub and guidance the SEC has issued on how to assess if a product is a security or a crypto asset.

Bill St Louis, Executive VP and Head of Enforcement at FINRA, mentioned that earlier this year, FINRA released its targeted examination of 500 communications from 17 firms to examine their compliance with FINRA Rule 2210, which requires communications with the public to be based on principles of fair dealing and good faith, be fair and balanced, and not false, misleading, promissory or exaggerative.

They found significant noncompliance by about 50% of firms. Some of the notable deficiencies they spotted included:

• lack of clarity of who was offering the cryptocurrency;
• comparisons of crypto assets to other asset classes, even cash – sometimes even comparing the asset to gold as an inflation hedge – with the differences not being explained;
• unwarranted assurances that the customer was getting the crypto asset from a registered broker-dealer;
• saying the asset had Securities Investor Protection Corporation (SIPC) protection, which almost always was not true, or listing crypto assets along with others that have such protection, but not pointing out the difference.

Ira Gluck, Director of FINRA’s Advertising Regulation Division, reminded the audience to consult the agency’s 2024 Annual Regulatory Oversight Report, which specifically addressed the steps member firms seeking to engage in crypto asset-related activity should do to identify and address the relevant regulatory and compliance challenges and risks.

“Compliance teams should implement an enhanced lexicon-based supervisory program for terms related to crypto assets so they can quickly locate and evaluate them.”

Carolina Rivas, CCO, Bci Securities, Inc

This would include, for example, reviewing and evaluating their supervisory programs and controls, and compliance policies and procedures, in areas such as cybersecurity, AML compliance, communications with customers, manipulative trading, performing due diligence on crypto asset private placements, and (as noted earlier) supervising their associated persons’ involvement in crypto asset-related outside business activities and private securities transactions.

Gluck added that vendor controls in the crypto arena are integral, since they can play an outsized role in helping to manage the asset in a number of ways, particularly their lifecycle plans, compensation structures and business and jurisdictional connections.

Lexicon-based supervisory programs

Speaking from the industry perspective, Carolina Rivas, CCO at Bci Securities, Inc, said brokerages should consider updating their compliance systems to address crypto topics, and that compliance teams should implement an enhanced lexicon-based supervisory program for terms related to crypto assets so they can quickly locate and evaluate them.

“Compliance teams should implement an enhanced lexicon-based supervisory program for terms related to crypto assets so they can quickly locate and evaluate them,” Rivas said.

This is particularly true in the spot bitcoin electronically traded product (ETP) arena.

Several FINRA panelists mentioned that the spot bitcoin ETPs have been mired in unbalanced and misleading communications as well. For example, Gluck noted that some firms conflate traditional electronically traded funds with these spot bitcoin ETPs too much – without pointing out the required differences, especially in terms of risk.

Mentioning traditional ETPs with the much newer spot bitcoin variety also is problematic, as Jason Foye, VP of the National Cause and Financial Crimes Detection Program (NCPC), and Jamie Udinson (Senior Director of NCPC), pointed out. This is because the crypto ETPs are registered under the Securities Act of 1933 and are not registered under the Investment Company Act of 1940, which needs to be clearly disclosed – so not in five-point font.

Parnit Das, Associate Director-Technology for FINRA’s Advertising Regulation Division, reminded the audience to consult Reg Notices 10-06 and 17-18, both of which cover FINRA’s expectations over communications made over social media.

Again, cryptocurrency was the main discussion here, with Rivas mentioning that advertisements for cryptocurrency can overly feed on investors’ FOMO, or fear of missing out.

She said she recently saw an advertisement for a spot bitcoin ETP that mentioned it had “the familiarity of an ETF,” which she took to mean “it’s familiar … so it’s safe for you.”

As Mike Gerana, also a senior director within the NCPC unit at FINRA, noted: FINRA is not actually passing judgment on these products. It’s an agency focused on its member firms and associated persons. It is there to assist member firms comply with securities rules that might come from the SEC, but it leaves with the securities watchdog the question of whether crypto assets are securities or not and which ones are approved for sale.

• More coverage of the FINRA Annual Conference is on its way.