Predictably, FINRA appears to align with the SEC in its assertion of jurisdiction over investments that may not ultimately qualify as securities. Regardless of where jurisdictional boundaries are ultimately drawn (through litigation or legislation or both), FINRA member firms should be cautioned to carefully consider the legal status (i.e. ie registration) of any investment that is not registered with the SEC prior to engaging in any commercialization of the asset, even if such commercialization is limited in scope. Member Companies should also pay attention to marketing ostensibly undertaken by their Affiliates, as marketing may – rightly or wrongly – be attributed to the Member Company. Ponzi schemes, pyramid schemes, and significant liquidity issues are making headlines for the crypto asset class right now, and FINRA, like other securities regulators, doesn’t want to be caught short by not not protecting public investors. These are the takeaways from FINRA’s announcement engaging in a marketing sweep of crypto assets, Crypto Asset Communications | FINRA.org.
The sweep, announced by FINRA on November 14, 2022, targets the marketing practices of FINRA member firms with respect to crypto asset products and services. Member firms involved will be required to produce all retail communications that have been distributed by the member firm. or its subsidiaries on its behalf, which refer to, relate to or relate to a crypto-asset or a service involving the transaction or holding of a crypto-asset.
It is important to note that for the purposes of scanning, a “crypto asset” is defined as a security that is not registered under the Securities Act of 1933 and transferred through the system of a registered clearing agency. Except for this exclusion for registered securities, the definition of Crypto Asset includes all assets that are issued or transferred using distributed ledger or blockchain technology, including but not limited to , virtual currencies, coins and tokens. For the purposes of the scan, retail communications include not only standard print marketing, but also video and social media.
The review has a broad scope. Member firms must create a tabular listing of all retail communications that fall within FINRA’s definition of a “cryptographic asset”, and indicate whether the communication has been submitted to FINRA’s Advertising Regulatory Department for review, and whether the communication has been approved by a registered director of the FINRA Member Firm. The date of first use with the public must also be disclosed; and each crypto-asset or service linked to the asset must be identified.
The review does not only focus on the marketing of the member business; it also focuses specifically on marketing involving member affiliates. In this regard, the Review will require Company Members to produce any written contracts or agreements between Company Member and any Affiliate relating to: (i) Company Member’s creation or dissemination of retail communications on behalf of the affiliate or services offered by the affiliate; and (ii) Affiliate’s use of Member Business customer information to determine who receives retail communications.
The scope of the scan also includes member firm internal procedures and written monitoring procedures. In this regard, member firms will be required to produce their policies and procedures for reviewing, approving, and maintaining records of their crypto asset communications, and provide FINRA with copies of training materials and guidelines. compliance.
The period covered by the sweep is July 1 to September 30, 2022. This sweep is particularly focused on marketing, but there will likely be more sweeps to come.