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Regulation and Compliance > Federal Regulation > FINRA

FINRA Looks at Reg BI in Light of GameStop Frenzy

By Melanie Waddell

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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.

These features, Cook stated, “can appear in many aspects of how broker-dealers interact with customers, from initial advertisements through the opening of accounts and the presentation of different investment choices to communications following a trade.”

Some of these game-like offerings, he said, “may also result in increased risks to customers if not designed with appropriate compliance considerations in mind, raising important regulatory questions.”

For instance, based on the facts and circumstances, do “some of these interactions constitute ‘recommendations’ that would be covered by the SEC’s Reg BI, which requires a broker-dealer making recommendations of securities to act in a retail customer’s ‘best interest’? If not, should they?”

Robinhood’s Platform Could be Viewed to Have ‘Game-Like Features’

Cook told Warren that Robinhood’s “platform incorporates digital interactions that could be viewed as having game-like features, as has been widely reported.”

FINRA “cannot discuss the status or conclusions of any FINRA supervisory, investigative or enforcement matters involving Robinhood or any other particular firm,” Cook stated.

However, FINRA is “generally assessing the use of these types of digital interactions within the securities industry, how they may impact investors’ decision-making, both positively and negatively, and risks they may create for investors,” Cook explained.

The recent market events involving trading in GameStop and similarly volatile stocks, Cook told Warren, “have raised important questions regarding the rules governing broker-dealer activity, many of which involve areas of market oversight and policymaking traditionally conducted primarily by the SEC.”

Accordingly, he continued, “FINRA supports the SEC’s announced review of these matters and will coordinate its potential regulatory responses with the SEC and other regulatory authorities based on the results of that review. FINRA also will continue to investigate specific matters involving its broker-dealer members related to these market events and take appropriate action, including potential disciplinary action, if the facts warrant.”

FINRA will also “consider whether additional rulemaking or guidance may be appropriate,” Cook said.

Melanie Waddell

@Think_MelanieW

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