What You Need to Know
- Since late 2020, the SEC has been considering whether the surge in retail trading, which isn't covered by Reg BI, warrants a regulatory response.
- FINRA, the enforcer of Reg BI, will look at how the rule applies to gamified trading apps.
- FINRA CEO Robert Cook is responding to a Senate inquiry into the GameStop short squeeze.
The Financial Industry Regulatory Authority is mulling how the Securities and Exchange Commission’s Regulation Best Interest applies to regulating game-like features offered via brokerage apps in light of the recent trading frenzy in GameStop and other stocks.
Sen. Elizabeth Warren, D-Mass., prodded Robert Cook, FINRA’s CEO, in a letter Feb. 12 to review Robinhood’s activities during the GameStop trading frenzy.
In her letter, Warren also asked Cook to explain how FINRA will respond to Robinhood’s role “in recent market volatility, its decision to cut off customers’ trading, and the broader concerns about market fairness that these events represent.”
Warren asked Cook to answer her questions by Feb. 22; She released Cook’s responses — sent to her on Feb. 23 — on Tuesday, the same day the Senate Banking Committee held its hearing: “Who Wins on Wall Street? GameStop, Robinhood, and the State of Retail Investing.”
FINRA is “committed to supporting the SEC staff’s review (announced in October 2020) of the increase in self-directed trading by retail investors that is not covered by Reg BI, and the effectiveness of existing regulatory requirements in protecting investors in those circumstances,” Cook told Warren. FINRA is responsible for enforcing Reg BI.
FINRA, Cook continued, “is also committed to supporting the SEC as it continues to oversee the implementation of Reg BI and considers further refinements in Reg BI’s application.”
At the same time, “FINRA is also considering the effectiveness of its own rules in addressing these developments,” Cook told Warren.
FINRA, Cook continued, “agrees with the SEC that ‘this is a dynamic, expanding, and ever-changing marketplace, and that it is our responsibility to consider whether existing protections can be improved.’”
Cook pointed to FINRA’s 2021 Examination and Risk Monitoring Report, which noted member firms’ use of emerging digital communication channels, “including app-based platforms with interactive or ‘game-like’ features that may be intended to influence customers, and related forms of marketing.”
The game-like features “we have seen across multiple firms include, among others, items such as badges that serve as visual markers of achievement, leaderboards that rank participants, social networking features (including in-app messaging) and prizes for games (such as free stock) to encourage account sign-ups,” Cook said.