GameStop Trading Highlights Social Media Risks for Registered Representatives

The recent GameStop stock-trading frenzy raises novel regulatory issues, including implications for registered representatives and their firms regarding social media use.

Media reports indicate that Keith Gill, also known as “Roaring Kitty” on YouTube and “DeepF—ingValue” on Reddit, is a leader of the WallStreetBets subreddit forum where the short-squeeze of GameStop took off.

According to the Financial Industry Regulatory Authority’s BrokerCheck, Gill is also a registered securities agent in Massachusetts, and that state’s securities division is reportedly reviewing Gill’s registration.This leads to the question: Are licensed professionals (and their firms) at risk when participating in these forums? The likely answer is yes.

Apart from state regulators, FINRA has a long-standing interest in the use of social media by registered representatives and is likely to conduct its own investigations of brokers involved in these forums. FINRA has published a number of regulatory notices regarding the use of social media by securities professionals, cautioning both member firms and registered representatives that violations of the relevant FINRA rules may impose liability for improper communications, failure to supervise, or books and records violations.

Below are some considerations for registered representatives and their employer-firms.

Communications With the Public

FINRA Rule 2210 governs communications with the public and requires member firms to supervise representatives’ public communications, including investment “recommendations.” FINRA does distinguish between personal and business communications—only content relating to the products and services of the firm is subject to Rule 2210. When those communications involve touting stock,however, lines may become blurred.

In any review of individual broker conduct, FINRA will also look to the employer-firm to determine whether it met its supervisory obligations. Firms should therefore train all employees regarding appropriate communications with the public, including requirements that any business communication made by associated persons is retained, retrievable, and supervised.

In February, FINRA released its 2021 Report on FINRA’s Examination and Risk Monitoring Program with a focus on digital communications. FINRA asks firms whether (i) their digital communications policy addresses all permitted and prohibited communications channels; and (ii)whether they review and follow-up on red flags that may indicate a representative is communicating through unapproved communication channels.

Firms should create and maintain up-to-date policies and procedures, including clearly defined permissible and prohibited digital communication channels; implement mandatory training that sets forth clear expectations for business and personal digital communications; and ensure reasonably designed supervisory processes are in place.

Accounts With Other Broker-Dealers

FINRA requires associated persons, prior to opening a brokerage account with a firm other than his or her employer, to notify that firm about their association with a FINRA member. Even if the account was opened prior to the person’s association with his/her employer-firm, the employee needs consent in order to maintain the account.

In situations like the GameStop trading scenario, registered representatives could face consequences with their firms and FINRA for failure to disclose outside brokerage accounts. Moreover, the FINRA member firm maintaining the account may have violated regulatory requirements if it failed to seek and obtain permission from the employing firm prior to opening the brokerage account.

This is another opportunity for firms to ensure they are meeting their supervisory obligations, including transaction review and investigation. Firms should have a process in place to review securities transactions by employees, particularly where those transactions occur outside the firm.

Outside Business Activities & Private Securities Transactions

Even assuming the representative’s activities take place outside of the office during personal time, FINRA rules impose disclosure and oversight requirements. FINRA Rules 3270 and 3280 require registered representatives to notify their firms in writing of proposed outside business activities (OBAs), and all associated persons to notify their firms in writing of proposed private securities transactions (PSTs), so firms can determine whether to limit or allow those activities.

For example, certain social media activity—such as hosting a YouTube channel opining on investments— could constitute an OBA; therefore, registered representatives should ensure that they understand applicable FINRA rules and their firms’ policies.

Firms can use questionnaires upon hire and periodically thereafter to obtain information and attestations from registered representatives about potential outside business activities and private securities transactions. Firms should also consider proactive reviews of social media to monitor for red flags.

Increased Risks for Registered Reps and Their Employers in Social Media Forums

Overall, registered representatives and their employer-firms face increased risks when engaging in securities-related activity in social media forums. This is particularly true if they are also trading in the securities promoted on those social media platforms in which they participate. Individual representatives should make sure they are familiar with their firms’ policies, and firms should have reasonable controls in place, specifically tailored to their business models.

Given the “new normal” of a work-from-home environment, firms also should expect that the lines between personal and business communications may be less clear, so training regarding communications with the public, OBAs, PSTs, and personal trading is more critical than ever.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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Jennifer Connors is a partner in Baker McKenzie’s North American Financial Regulation and Enforcement Practice. She represents a wide variety of market participants including broker-dealers, investment advisers, private fund managers, alternative trading systems, payment systems and FinTech companies, on federal and state securities laws, SEC and FINRA rules, and market regulation matters.

Mark Fitterman is a senior counsel in Baker McKenzie’s North American Financial Regulation and Enforcement Practice. He advises a wide variety of clients covering the full gamut of the securities industry, including broker-dealers, exchanges, alternative trading systems, transfer agents and clearing agencies.

Kristal Petrovich is an associate in Baker McKenzie’s North American Financial Regulation and Enforcement Practice. She has represented broker-dealers, investment advisers, public companies, and individuals in regulatory investigations and proceedings brought by the SEC and FINRA.