FINRA has announced that it is conducting a targeted examination of broker-dealer practices related to retail communications about “crypto asset” products and services. As part of this sweep, FINRA is asking broker-dealers for all retail communications that were distributed or made available by a broker-dealer or its affiliates on behalf of the broker-dealer that refer or relate to crypto assets or services involving crypto transactions or the holding of cryptocurrency during the period of July 1, 2022, to September 30, 2022.
FINRA clarifies that “retail communications” means any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30-calendar-day period. Video, social media, mobile applications, and websites also generally fall into this communications category.
Pursuant to the announcement, broker-dealers must provide the following:
- A list identifying each such communication that also:
- Includes the date the communication was first made available to the public.
- Identifies whether the communication was filed with FINRA’s Advertising Regulation Department (if so, the FINRA reference number must be included).
- Indicates whether the communication was approved by a registered principal of the firm (if so, the date of approval must be included and the broker-dealer must provide separately records that reflect such approvals).
- Identifies each crypto asset and/or service involving the transacting or holding of a crypto asset that the communication refers to, relates to, or concerns.
- The broker-dealer’s (1) written supervisory procedures concerning these communications and (2) compliance policies, manuals, training materials, compliance bulletins, and any other written guidance, in each case, that were in effect during any portion of the three-month period.
- Any contracts or written agreements between the broker-dealer and any affiliate regarding the broker-dealer’s creation or dissemination of communications on behalf of the affiliate or about the affiliate’s services, in addition to the affiliate’s use of information about the broker-dealer’s customers to determine who would receive the communications.
Firms that received this exam request should be thoughtful in their response. Although FINRA is requesting information sent out by affiliates on behalf of a broker-dealer, it is unclear which communications FINRA will consider involving a broker-dealer affiliate, especially where entities use similar names.
Further, to the extent that broker-dealers have affiliated entities through which crypto assets are offered, and those offerings are made available in association with, but not necessarily through, the broker-dealer, communications by broker-dealer affiliates could be captured to the extent they involve common customers, common agreements, or common distribution channels, or if the communications are not clear regarding which entity is sending the communication.
Finally, in light of the recent issues involving crypto asset exchanges, broker-dealers in general should be mindful of their crypto-related activities going forward, given the increased regulatory scrutiny such activities will likely face and considering the US Securities and Exchange Commission’s recent summary judgment victory in SEC v. LBRY, Inc.