FINRA gave the social media activities around the GameStop problem very poor ratings. The regulator’s first stance is to investigate whether there has been any misrepresentation of any magnitude that would have affected the market
The financial industry regulator is likely investigating social media activity by brokers linked to the GameStop stock trading frenzy. Ultimately, this could lead to a review of companies’ oversight procedures and fine-tuning of their compliance policies.
The erratic trade that caused GameStop stock’s price to soar to a high of $ 483 on Jan. 28 before collapsing was fueled in part by a Reddit board that users were promoting the stock to Take action against Wall Street companies that bet against it. After weeks of wild swings, the stock closed at just over $ 50 on Tuesday.
No misconduct has yet been shown. Boston-based Reddit user and registered broker Keith Gill, known as « DeepF-ingValue, » received a subpoena on Monday due to appear before the Securities Department of the Massachusetts Secretary of the Commonwealth later that month.
Since Gill is registered in Massachusetts, the securities department is « doing a standard check on that registration, » a regulator spokesman said.
The state securities commission sent a letter to Gill’s former employer, Massachusetts Mutual Life Insurance Co., on Jan. 29, asking for information about whether he knew of his social media presence.
The letter received from Law360 requested Gill’s employment details, details of his role and responsibilities, the company’s policies and procedures for monitoring employee social media activities, and the reasons the company stopped Gill’s Reddit activities has not reported – as well as YouTube posts under « Roaring Kitty » persona – as « other business activity ».
A MassMutual spokesman said the company is looking into the matter and has no further comment. Gill could not be reached.
While regulators are carefully investigating what went wrong and whether the rules were broken, FINRA will likely conduct its own investigation into registered brokers who may have been circumventing their rules, said Susan Light, an LLP partner of Katten Muchin Rosenman and former Chief Counsel of Enforcement and Senior Vice President at FINRA.
The FINRA rules cover everything from overt market manipulation to business-related digital communications that brokers engage in outside of work, Light said, noting that the rules still apply when the chatboard-based stock-pumping activities fail are explicitly specified.
“I don’t think FINRA cares which medium is used. It could be a registered agent with an airplane with a banner campaigning for the XYZ inventory, ”she said.
In accordance with FINRA rules, brokers are required to inform their employers of all outside business activity, including work-related social media activity, so brokers will likely be the first focus of any investigation, the lawyers said.
However, companies also need to monitor the activities of their agents, which could become a « potential enforcement area » if their oversight is found to be negligent, said Kyle DeYoung, partner at Cadwalader Wickersham & amp; Taft LLP’s litigation and regulatory practice in financial services and a former senior attorney in the enforcement division of the United States Securities and Exchange Commission.
« The initial focus of any regulatory enforcement activity will be to see if any misrepresentation was made on a scale that would have impacted the market, » DeYoung said. « The second question regulators will ask when a single broker promotes GameStop is, » What has the company done and should they have done more? «
DeYoung noted that FINRA is likely to take the lead in investigating individual broker behavior and any regulatory issues with their businesses. The SEC will investigate possible market manipulation and major regulatory issues, he added.
He noted that most companies already have guidelines for monitoring their employees, but said that an « updated approach » to social media activity may be needed.
« I think everyone knows that posting business-related messages or promoting stocks on Facebook or LinkedIn is covered, » he said. « However, companies should make it clear that these guidelines apply to chat boards and discussions like the one on Reddit. »
« I’m sure a lot of companies are doing fine here, but if your guidelines were written a few years ago, you may not have seen the role these forums can play, or you may not have a feel for how active people are in them « , he added.
FINRA Rule 2210 on Communications requires companies to monitor and report certain public notices, including « investment advice ». However, the regulator has treated social media rules as platform independent, so they apply to existing and emerging media.
« Social media may be a new medium, but FINRA’s rules for communicating with the public still apply, » said the guidelines published on its website. « The rules protect investors from false, misleading assertions, exaggerated statements, and material omissions. »
In a February 1, 2021 report on its auditing and risk monitoring program, FINRA also urged companies to monitor emerging digital communication channels and stressed the importance of logging and tracking potential red flags and keeping books and records in accordance with the Follow FINRA rules.
« Does your company’s digital communications policy take into account all permitted and prohibited digital communication channels and functions available to your customers and connected persons? » FINRA asked in the report and the regulator declined to comment on this matter.
Chief Compliance Officers provide training on FINRA regulations and their companies’ internal oversight procedures, but it is up to the registered directors of companies – such as CEOs and branch managers – to oversee their employees for this purpose, said Dave Banerjee, president of the Southern California Compliance Group, a membership group that works regularly with FINRA and the SEC on regulatory matters.
School principals need to ensure they update written oversight procedures, receive further training, and « receive at least one annual certificate that staff have access to the procedures, » he said.
However, the rules are designed to be « appropriateness, not effectiveness, » said Banerjee. When school principals provide adequate training and documentation related to their market and business, much of the burden of complying with the rules rests on the staff.
« To the extent that school principals and executives can demonstrate that adequate controls are in place, they would not face as big a consequence as the perpetrator, » he said.