The Financial Industry Regulatory Authority is looking for more information about how firms handled retail communications “concerning cypto asset products and services” in the wake of last week’s FTX collapse.
The regulatory organization announced a targeted exam in a notice posted on its website Monday, marking July 1 through the end of September this year as the period in question. FINRA revealed it would ask about 20 probed firms to “provide all retail communications” concerning crypto assets, or services used to trade or hold those assets. The exam begins today.
FINRA spokesman Ray Pellecchia said with the growth in the crypto market, the harm that could be caused by “misrepresentation or exaggerated claims” by firms in their retail communications had increased, and customers may not understand that securities law may not necessarily protect them.
“This risk is not hypothetical,” Pellecchia said. “The limited number of crypto-asset related communications filed with FINRA by broker/dealer firms fail to comply with applicable standards at a significantly higher rate than communications for other products.”
FINRA defines retail communication as “any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period.” In addition to written communications, it applies to video, social media, mobile apps and websites.
The announcement comes the week after the crypto space hit a crisis point with the collapse of FTX, its second-largest exchange. Many expect civil and criminal charges against the exchange and its former CEO, Sam Bankman-Fried, and are wondering whether the mess will accelerate regulation in the crypto arena.
In its notice detailing the exam, FINRA asked firms to provide additional information for each individual communication, including the date it was first made to the public, whether it was filed with FINRA’s Advertising Regulation Department, whether a principal at the firm approved the communication and to identify the crypto assets and/or services mentioned in the communication.
Additionally, FINRA wanted firms to provide written supervisory procedures concerning the “review, approval, record-keeping and dissemination” of the communications, as well as any relevant compliance policies or materials. Additionally, it asked for details on agreements with affiliates about creating or disseminating the communications, including what information those affiliates would have on which customers should get them.
In a webinar detailing the FTX saga, Ric Edelman, founder of the Digital Assets Council of Financial Professionals, called it a “black eye on crypto,” while Matt Hougan, the chief investment officer at Bitwise Asset Management, tried to find a silver lining. He said FTX’s downfall may inadvertently help shepherd crypto into the mainstream via more scrutiny.
“This is going to catalyze regulators to come into the space—aggressively and rapidly,” he said. “To some degree, this shows that they already should’ve.”
