The Financial Industry Regulatory Authority, or Finra, has begun an exam sweep to learn more about how broker-dealers are partnering with social media influencers, as well as their other online practices.
Finra published a summary of what its exam letters are targeting in September. It plans to ask firms to describe how they find and or contract with influencers, how it compensates them, and what relevant compliance practices they have in place, among other things.
The self-regulatory organization for broker-dealers does not disclose the specific number of firms that receive exam letters, a Finra representative told RIA Intel. The number of firms sent an exam letter can vary from a few to dozens, depending on the request, according to Finra’s website. Firms are selected based on a variety of factors including “level and nature of business activity in a particular area, customer complaints and regulatory history, and prior examination findings.”
The exam letters were delivered only a few weeks after the SEC asked for comments about similar practices. In the SEC’s request, the regulator posed nearly 400 questions to brokerages and wealth managers, many about behavioral manipulation and gamification incorporated into apps.
“I think we do have concerns. I commend the SEC for its recent request for comment about digital engagement practices, because I think that document laid out a number of potential concerns here and a number of regulations that might be in play and might need to be looked at again,” said Robert Cook, president and CEO of Finra, said in a speech at the North American Securities Administrators Association’s (NASAA) annual conference in September.
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Finra’s letters and the SEC’s request are standard parts of a regulatory discovery process to determine if there is a need for additional guidance or regulation. In December, the SEC codified new rules governing how investment advisors can market themselves. Meanwhile, social media, and its influential users, are becoming increasingly impactful.
In January, retail investors, wheedled by MassMutual employee Keith Gil posting online under the moniker Roaring Kitty, coordinated a short squeeze and began buying call options on video game retailer GameStop. The group nearly blew up a $12.5 billion hedge fund. In September, Massachusetts state regulators fined MassMutual $4.75 million for failing to adequately supervise Gill and other agents’ online activity. (Gill frequently posted about his trades on Reddit and touted his growing position in GameStop on his YouTube channel — he shared photos of his investments growing in value from $53,000 to $48 million.)
“I think both the SEC and Finra are trying to figure out how firms and associated persons are using technology and social media these days with a view towards proposing new rules,” said Max Schatzow, an attorney at the law firm Stark & Stark.
Finra was formed for broker-dealers but any dual-registered RIA falls under their purview. Nearly half of all Finra registered individuals are dual registered.
For RIAs not subject to Finra's oversight, the regulator’s social media sweep should serve as a reminder that social media marketing activities are compliant with the new SEC rules, said Brian Thorp, founder of Wealthtender, a new website where investors can rate and review financial advisors.
Holly Deaton (@HollyLDeaton) is a staff writer at RIA Intel and based in New York City.