Finra will zero in on online brokerage platforms that use interactive and “game-like” features and step up reviews of firms’ compliance with Regulation Best Interest in coming months.
In a report on its examination and risk monitoring program, the Financial Industry Regulatory Authority Inc. said it will “address risks relating to new digital communication channels” as one of its examination priorities this year.
“This focus includes risks associated with app-based platforms with interactive or ‘game-like’ features that are intended to influence customers, their related forms of marketing, and the appropriateness of the activity that they are approving clients to undertake through those platforms,” according to the report.
The so-called gamification of investing has been a source increasing concern for regulators.
Last week, the Securities and Exchange Commission said it would closely review actions by brokerages that “may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities” after trading in shares of GameStop and other stocks was shut down following buying frenzy catalyzed by the online platform of Reddit.
Late last year, Robinhood was targeted in a complaint by Massachusetts securities regulator William Galvin for allegedly harming investors through its gamification strategies.
In its report, Finra noted “a surge in new retail investors entering the markets via online brokers” as well as spike in certain kinds of trading, such as options. It warned brokers about potential compliance deficiencies related to the interactive apps that attract new customers.
“While such features may improve customers’ access to firm systems and investment products, they may also result in increased risks to customers if not designed with appropriate compliance considerations in mind,” the report said.
Gamification is a new regulatory challenge for Finra, said Brad Bennett, a former Finra director of enforcement. “This is something Finra is going to have to respond to or defend the status quo,” Bennett said. “When you make stock trading look like a fantasy sports app, you may be unleashing forces that are beyond your control.”
“In 2021, we intend to expand the scope of our Reg BI and Form CRS reviews and testing to effect a more comprehensive review of firm processes, practices and conduct,” the report states.
Other exam priorities include cybersecurity, best execution, variable annuities and compliance with the reporting of trading activity through the Consolidated Audit Trail. Brokerages are having to cope with new regulatory requirements, technological advances and disruptions caused by the coronavirus pandemic, said Emily Gordy, a partner at McGuireWoods.
“It’s kind of a perfect storm,” said Gordy, a former Finra senior vice president of enforcement. “Firms can mitigate risk by reviewing their procedures, the way they do business and how they communicate with customers to ensure compliance with [regulatory] obligations.”
This year, Finra consolidated its annual examination priorities letter and examination findings report into one document to give firms one-stop compliance guidance.
“FINRA continues to identify new ways to provide member firms with information they can use to assess and strengthen their compliance, supervisory and risk management programs,” Bari Havlik, Finra executive vice president for member supervision, said in a statement. “This report is designed to give member firms a single, authoritative source that provides insights derived both from the last year’s examinations and risk assessments, and from where we have identified emerging issues for the coming year.”
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