FINRA’s 2021 Report on Examination and Risk Monitoring Program mentions several current topics including digital assets and “game like” trading.
According to the report, Exam Findings regarding digital asset trading has uncovered shortcomings when it comes to investors using digital asset marketplaces. To quote the report:
“Deficient Digital Assets Communications – Failing to balance promotional statements with prominent risk disclosures; including false, misleading or unwarranted statements; using the same firm names, websites and other materials for broker-dealers and their digital asset affiliates; not identifying the (non-broker-dealer) entities responsible for digital asset offerings; and implying that digital assets were offered by the broker-dealer.”
Regarding “Emerging Digital Communication Risks,” FINRA points a finger at emerging digital trading platforms that have “interactive” features and game-like trading that may induce users to shoulder increased risk. While Robinhood is not mentioned by name, the digital trading platform has recently been under the microscope regarding how its social aspect may boost trading.
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 the appropriate compliance considerations in mind. Firms must evaluate these features to determine whether they meet regulatory obligations to:
- comply with any Reg BI and Form CRS requirements if any communications constitute a “recommendation” that requires a broker-dealer to act in a retail customer’s “best interest”;
- make disclosures relating to risks to customers, fees, costs, conflicts of interest, and required standards of conduct associated with the firm’s relationships and services;
- prohibit the use of false, exaggerated or misleading statements or claims in any communications and ensure all firm communications are fair and balanced and do not omit material information concerning products or services;
- comply with account opening requirements that require firms to gather information about customers (such as FINRA Rule 4512 (Customer Account Information)) and approve certain types of accounts, including options accounts (such as FINRA Rule 2360(b)(16) (Diligence in Opening Accounts) and other supervisory controls relating to options, such as surveilling for options‑related customer complaints, excessive commissions and fees, and large amounts of losses);
- develop a comprehensive supervisory system for such communication methods, including surveilling for red flags of potential violative behavior and maintaining books and records of all communications related to the firm’s business as such; and
- address compliance with FINRA communications rules, such as FINRA Rules 2210 (Communications with the Public); 2211 (Communications with the Public About Variable Life Insurance and Variable Annuities); 2212 (Use of Investment Company Rankings in Retail Communications); 2213 (Requirements for the Use of Bond Mutual Fund Volatility Ratings); 2214 (Requirements for Use of Investment Analysis Tools); 2215 (Communications with the Public Regarding Securities Futures); 2216 (Communications with the Public Regarding Collateralized Mortgage Obligations) and 2220 (Options Communications).
The recent emergence of trading forums, like subreddit Wallstreetbets, and the potential for outsized influence on targeted securities, has caused a rush for both elected officials and regulators to scrutinize the convergence of tech and trading. Both the US House of Representatives and the US Senate will hold hearings on this new phenomenon and recently it was reported that the Secretary of the Treasury is convening a meeting of policymakers to discuss the issue. One may expect FINRA to investigate actions taken by Robinhood as well as other trading venues.
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