The Financial Industry Regulatory Authority (Finra) announced yesterday it has launched targeted examinations seeking information from broker-dealers on their retail communications regarding cryptocurrencies in the wake of FTX’s implosion last week.
In an exam notice published on Finra’s website, the regulator said it is conducting exams “concerning crypto asset products and services.”
The exams, which were launched November 14, will focus on about 20 firms who are being asked to “provide all retail communications” concerning crypto assets, or services used to trade or hold those assets.
With the growth in this market, “the potential harm caused by misrepresentations or exaggerated claims in retail communications that promote or recommend a crypto asset or a service involving the transaction or holding of a crypto asset has also increased,” Finra spokesman Ray Pellecchia said.
Customers may not be aware that protections offered by the securities laws, such as SIPC protection or the segregation of client assets, may not exist when purchasing crypto assets, he added.
“This risk is not hypothetical. 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,” Pellechia said.
The sweep exam is designed to allow Finra “to develop a better understanding of industry practices in this area,” he noted.
Retail communication is defined by Finra as “any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period.”
The exam requests are also asking firms for video, social media, mobile apps and websites pertaining to cryptocurrency communications.
Firms are being asked to provide communications from July 1 through the end of September this year to the regulator.
Beyond actual communications, Finra is also asking firms to provide their written supervisory procedures concerning communications, as wells as compliance policies, manuals, “and any other written guidance in.”
The regulator also wants copies of all the contracts broker-dealers have signed regarding relationships with affiliates and details about any determination that was made with them regarding which of firm customers received information.
FTX, one of the world’s largest cryptocurrency exchange, filed for Chapter 11 bankruptcy last week, and investigators are now looking into what went wrong. The exchange has been accused of using customers’ funds for investments without permission and possibly even political contributions.
The melee was set off when Changpeng Zhao, the billionaire founder of Binance, the world’s biggest crypto exchange by trading volume, tweeted that his company was in the process of dumping its stash of more than $500 million worth of FTT, FTX’s token, the Wall Street Journal reported.
“Zhao said the move was for “risk management” purposes, citing a recent report on crypto website CoinDesk revealing that billions of dollars worth of the illiquid token were sitting on the balance sheet of FTX’s sister firm, Alameda,” the paper said.
In a webinar on FTX’s collapse last week, Ric Edelman, founder of the Digital Assets Council of Financial Professionals, called the debacle a “black eye on crypto.”
Ric Edelman, founder of the Digital Assets Council of Financial Professionals, called FTX’s failure a “black eye” on the industry during a webinar last week.