The Financial Industry Regulatory Authority will likely introduce additional guidance and potential rulemaking related to “meme stocks,” according to Chief Legal Officer Bob Colby, speaking on a panel discussion at SIFMA’s Compliance & Legal Forum this week.
FINRA issued regulatory notices reminding firms of their best execution obligations in March and June of this year, after a run on GameStop’s stock earlier this year led to Robinhood’s decision to temporarily end trading in the stock and the ensuing volatility. According to Colby, the agency knew that the Securities and Exchange Commission was interested in pursuing guidance and rules on certain questions springing from the ordeal, including the gamification of self-directed accounts.
FINRA has avoided addressing some of those issues in reg notices before the SEC acts, but Colby believes the agency might pursue guidance or rules for firms offering complex securities, whether through recommendations, or even in self-directed accounts, where the account encourages trading with ‘behavioral science’ techniques.
“We’re trying to figure out ‘how does that fit in the world?’” he said. “It used to be a clear dichotomy between self-directed and recommended or advised, but now we’re finding there may be processes not directed to particular securities (though they may be), that aren’t what we used to think of as recommendations, but they are definitely trying to incent people to trade in those securities.”
In the discussion moderated by Ben Indek, a partner with Morgan, Lewis & Bockius, Colby said FINRA would likely move forward with reg notices first, and depending on the comments they receive, would then see whether it’s necessary to move forward on rulemaking.
“No pun intended, (but) that could be a gamechanger,” Indek said. “If we move across from what we always thought of as a recommendation in the old world to something different now, now that could be a difference-maker.”
FINRA enforcers were looking into payment for order flow and firm’s best execution compliance during volatile market moments like this past winter, according to Jessica Hopper, an executive vice president and head of enforcement at the agency. She stressed that these rules existed regardless of the challenges and volatility in the market, and that firms have to be able to handle these moments even if they are outliers.
“We’re always looking at individual registered representatives and making sure their sales practice activity is sage, is not harming investors and is complying with the rules,” she said. “You can imagine in this space with this type of volatility, we’ll see the potential for greater abuse, and sure enough we’re focused on the reps taking advantage of the volatility to take advantage of customers.”
Hopper said her division was also looking into how zero commission practices related to the “meme stock” saga.
While zero commission policies and firms had undoubtedly brought more retail investors into the markets, Stephanie Dumont, an executive vice president and head of market regulation and transparency services at FINRA, said firms needed to be mindful of regulatory requirements. In 2020, FINRA had launched a sweep on zero commission practices, looking into execution quality, how firms’ other revenue sources could be impacted by zero commissions, as well as disclosures, messaging and advertisements.
“If you’re out there messaging you’re zero commission, make sure it’s accurate,” Dumont said. “Are you zero commission overall, (and) is what you’re messaging out explaining and prominently disclosing exactly what you’re doing?"
