FINRA top official wants oversight “beyond just the trading activity”

Rick Steves

“It’s not necessarily just the trading, but it’s looking at the holistic products and services your institution provides”, said Mr. Ruppert.

Greg Ruppert, head of the National Cause and Financial Crimes Detection Programs at FINRA, defends a holistic approach to supervision in capital markets.

Speaking at a virtual conference of the Securities Industry and Financial Markets Association, the top official made statements that address the general security of capital markets and abstained from focusing in detail on the ‘meme stocks’ mania.

“Like any market events, we’re looking at identifying any compliance and risk concerns [and] we’re coordinating with the [U.S. Securities and Exchange Commission] and the states.”

Regarding “market events in general”, Mr. Ruppert defended that to uncover market manipulation or fraud, trading companies should be examined “beyond just the trading activity”. This would include searching the “worldwide web of offerings that are existing to your clients” and looking at activities that are “one or two steps removed” from their offerings.

“It’s not necessarily just the trading, but it’s looking at the holistic products and services your institution provides”, Mr. Ruppert added.

Among many programs, Mr. Ruppert oversees FINRA’s Office of the Whistleblower and Tip Program, Fraud Surveillance, and specialist teams for anti-money-laundering and cybersecurity.

FINRA has taken a very dim view of social media activity surrounding the GameStop issue. The regulator’s initial stance will be to investigate whether there were any misstatements made on a scale that would have impacted the market.

The Financial Industry Regulatory Authority is likely investigating the social media activity of brokers tied to the GameStop stock-trading frenzy, which could ultimately lead to scrutiny of firms’ supervisory procedures and require fine-tuning of their compliance policies.

The erratic trading that sent GameStop’s share price soaring to a high of $483 on January 28 before crashing down was fueled in part by a Reddit board where users promoted the stock to counter Wall Street firms that had bet against it. After weeks of wild fluctuations, the stock closed Tuesday at just over $50.

No wrongdoing has yet been shown. But Boston-area Reddit user and registered broker Keith Gill, who posted under the name “DeepF—ingValue,” was issued a subpoena Monday to appear before the securities unit of the Massachusetts Secretary of the Commonwealth later this month.

Because Gill carries a Massachusetts registration, the securities unit “is conducting a standard review of that registration,” a spokesperson for the regulator said.

The state securities regulator also sent a letter Jan. 29 to Gill’s former employer, Massachusetts Mutual Life Insurance Co., requesting information on whether it knew about his social media presence.

The letter, obtained by Law360, requests Gill’s dates of employment, details on his role and responsibilities, the company’s policies and procedures for monitoring employees’ social media activity, and asks why the firm did not report Gill’s Reddit activity — and YouTube posts under the “Roaring Kitty” persona — as an “other business activity.

A MassMutual spokesperson said the firm is reviewing the matter and had no further comment. Gill could not be reached.

As regulators look into exactly what went wrong and if any rules were broken, FINRA is likely conducting its own investigation into any registered brokers who may have skirted its rules, said Susan Light, a Katten Muchin Rosenman LLP partner and former chief counsel of enforcement and senior vice president at FINRA.

FINRA rules cover everything from blatant market manipulation to the business-related digital communications that brokers engage in outside of work, Light said, noting that the rules still apply even if chat board-based stock-pumping activities aren’t explicitly specified.

“I don’t think FINRA cares what medium is used. It could be a registered representative with an airplane with a banner advocating for ‘XYZ’ stock,” she said.

In accordance with FINRA’s rules, brokers are required to inform their employers of any outside business activities they engage in, including work-related social media activity, so the brokers will likely be the initial focus of any probes, attorneys said.

But firms are also required to monitor their representatives’ activities, which could become a “potential area of enforcement” if their supervision is found to have been lax, said Kyle DeYoung, a partner in Cadwalader Wickersham & Taft LLP’s financial services litigation and regulation practice and former senior counsel in the U.S. Securities and Exchange Commission’s enforcement division.

“The initial focus of any regulatory enforcement activity will be whether there were any misstatements made on a scale that would have impacted the market,” DeYoung said. “But the second question regulators will ask if an individual broker was touting GameStop is, ‘What did the firm do and should they have done more?’”

DeYoung noted that FINRA will likely take the lead on investigating the behavior of individual brokers and any supervision issues with their firms. The SEC will look into potential market manipulation and larger regulatory framework issues, he added.

He noted that most firms already have policies in place to monitor their employees, but said a “refreshed approach” to social media activities may be needed.

“I think everyone knows that posting business-related messages or promoting stocks on Facebook or LinkedIn is covered,” he said. “But firms should make clear that these policies apply to chat boards and discussions like those on Reddit.”

“I’m sure many firms are fine here, but if your policies were written a couple years ago, you might not have seen the role that these forums can play or have a sense of how active employees are on them,” he added.

FINRA Rule 2210 on communications requires firms to supervise and report certain public communications, including investment “recommendations.” But the regulator has come to treat social media rules as platform-agnostic, so they apply across existing and emerging media.

“Social media may be a new medium, but FINRA’s rules on communicating with the public are still applicable,” the regulator states in guidance posted to its website. “The rules protect investors from false, misleading claims, exaggerated statements, and material omissions.”

 

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