FINRA sweeps communications for crypto assets

In brief:
– On the heels of a volatile year for cryptocurrency, FINRA has asked broker dealers to disclose their communications data surrounding crypto assets

– The targeted exam letter comes at a time of increased focus on transparency within financial services – from communications to climate-related data

– Firms that have failed to implement adequate policies, procedures, and controls and invest in technology may struggle to keep up with increasing regulatory requirements and disclosures

The Financial Industry Regulatory Authority (FINRA) has announced that it is conducting a sweep of retail communications relating to cryptocurrency products and services. In a targeted exam letter, FINRA has asked that broker dealers involved in the retail sale of crypto should disclose crypto asset communications data collected from July 1, 2022 to September, 30 2022.

In particular, FINRA has asked that between the above dates, broker dealers should provide “all retail communications that were distributed or made available by the firm or its affiliate(s) on its behalf that refer to, relate to, or concern a crypto asset”. The targeted exam letter specifies a number of criteria that firms should meet in submitting the above data. In particular, the data should be disclosed in a tabular list which includes:

– The date on which the communication was first made available to the public

– Whether the communication was filed with FINRA’s Advertising Regulation Department

– Whether the communication was approved by a registered principal of the firm

– Identification of the crypto asset or transaction that the communication refers to

FINRA has also asked firms to divulge their written supervisory procedures concerning review, approval, recordkeeping and dissemination of communications, as well as any policies, manuals, and training materials that are pertinent to communications.

Too little, too late for crypto communications?

FINRA’s targeted exam letter will come as no surprise to those who have been tracking the volatile market movements for crypto over the last year. While in February 2022 the future looked bright for cryptocurrency, that soon came crashing down with the collapse of TerraUSD (UST) on May 9, 2022. What followed, including the significant investor pull of $7tn from Tether, saw crypto’s bright future considerably overshadowed.

While the markets have attempted to regain stability, the recent collapse of FTX has thrown the market into significant and potentially irreparable turmoil. With that turmoil, layers of misconduct and potentially non-compliant activity have been revealed. It’s little wonder that regulators are acting to understand how crypto assets have been communicated and marketed, though some may ask why such activity wasn’t investigated sooner.

What does the targeted exam letter mean in practice?

It’s important to look at FINRA’s targeted exam letter in the context of wider regulatory operations.

On November 4, 2022, the Securities and Exchange Commission’s (SEC) latest Marketing Rule came into effect. The Marketing Rule, which implements wide-ranging changes under the Investment Advisers Act of 1940, has gained notoriety for being unduly complex. As part of this rule, amendments were made to the recordkeeping requirements of investment advisers. Specifically, the Rule states that “investment advisers must make and keep records or all advertisements they disseminate, and certain alternative methods for complying with this provision are available for oral advertisements, including oral testimonials and oral endorsements.”

FINRA’s latest action echoes many of the requirements under the SEC’s new rule. For firms that are contending with both new regulatory obligations and FINRA’s letter, there could be a battle to disclose. This is especially true when considered alongside other disclosure rules, such as those related to climate. Firms that have watertight communication archives in place will likely be better equipped to manage, especially if those archives allow for swift audit and reporting. Firms that use a patchwork of archives and third parties to manage communications may not fare so well. 

FINRA’s targeted exam letter is characteristic of a wider trend for financial services – one that is moving towards greater transparency and accountability. From climate change disclosures to senior manager’s pay, regulators are looking to lift the lid on the inner workings of financial institutions – empowering investor-led trust and education, in turn. While these recordkeeping requests may be a headache for now, it’s worth noting that this is not a ‘one-and-done’. Such requests will only increase in the near future, especially as regulators look to bring cryptocurrency within their regulatory perimeters. Firms should act now to ensure their systems, policies, procedures and controls are well equipped to manage – or risk punitive regulatory action further down the line.

If you’re looking for an end-to-end solution for compliant communications that allows for streamlined regulatory audits and reporting, we’d love to hear from you.