According to Chief Legal Officer Bob Colby, who addressed a panel discussion at SIFMA’s Legal & Compliance Forum this week, the financial industry regulator is likely to introduce additional guidance and potential regulations regarding “meme stocks”.
FINRA issued regulatory notices in March and June of this year to remind companies of their best execution commitments after a run on GameStop stock earlier this year led to Robinhood’s decision to stop trading the stock and the ensuing result Temporarily suspend volatility. According to Colby, the agency knew the Securities and Exchange Commission was interested in pursuing guidelines and rules on certain issues that arose from the ordeal, including gamifying self-directed accounts.
FINRA has avoided addressing some of these issues in registration notices before the SEC acts, but Colby believes the agency could pursue guidelines or rules for companies offering complex securities, whether through referrals or even in self-directed accounts where the trading account promotes “behavioral science” techniques.
“We’re trying to figure out how that fits into the world?” He said. “It used to be a clear dichotomy between self-directed and recommended or recommended, but now we are realizing that there are processes that are not geared towards specific securities (although they may be) that are not what we thought they were before have recommendations, but they are definitely trying to get people to trade these stocks. “
In the discussion moderated by Ben Indek, a partner with Morgan, Lewis & Brockius, Colby said that FINRA would likely move forward with registration notices first and then, based on the comments received, consider whether there was a need to move forward with rulemaking.
“No pun intended, (but) that could be a game changer,” Indek said. “If we move from what we always considered recommended in the old world to something else, that could be a difference now.”
According to Jessica Hopper, Executive Vice President and Head of Enforcement for the agency, FINRA enforcement agencies looked into payment for order flow and the company’s compliance with best execution during volatile market periods like last winter. She stressed that these rules exist regardless of the challenges and volatility of the market and that companies must be able to deal with these moments, even if they are outliers.
“We always pay attention to individual registered agents and make sure their sales practices are wise, do not harm investors and follow the rules,” she said. “You can imagine that in this area with this type of volatility we see the potential for greater abuse and we are focusing on the salespeople who are using the volatility to take advantage of customers.”
Hopper said her department has also investigated how the zero commission practices relate to the “meme shares” saga.
While zero commission policies and companies had undoubtedly brought more retail investors into the markets, Stephanie Dumont, executive vice president and head of market regulation and transparency services at FINRA, said that companies must comply with regulatory requirements. In 2020, FINRA had started a free sweep Practices, quality of execution study, how zero commissions could affect other revenue streams for companies, and disclosures, news and advertising.
“If you send messages out there you don’t get any commission, make sure it’s correct,” Dumont said. “Are you total no commission, (and) explain and disclose exactly what you are doing?”