Regulatory Update

SEC Suspends Trading on 15 Securities for Unusual Social Media Activity

March 01, 2021by Robert Cruz

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Last Friday, The US Security and Exchange Commission (SEC) suspended trading on 15 securities based upon unusual trading and social media activity. The action was in response to recent market activities, including GameStop, where activities over social media were undertaken by retail investors to “artificially inflate their stock price.” The SEC noted that the move was intended to reduce market volatility that has the impact of harming investors. This action, along with a series of other actions suspending trading due to unusual social media activity, can result in a suspension of trading activity for 10 days under existing SEC rules.

GameStop and Roaring Kitty confound regulators

The case study of GameStop and Roaring Kitty continues to expose new dimensions. It is about the little guy versus institutional investors. It is about the asymmetry of information available to buyers and sellers of securities that can lead to market manipulation. However, it is also about individuals who could very well be employed by your firm, some of whom are in roles that are registered and regulated. Individuals working from home, where the line between personal and business time has been obliterated, and where the latest chat application, message board, or encrypted mobile application is just a simple download away.

It was inevitable that this story (which, in reality, had been ongoing for over a year) would result in litigation. It was also inevitable to draw a regulatory response. FINRA’s Risk and Exam Priorities letter highlighted the responsibility for firms to monitor employees for outside business activities (OBA) to adhere to FINRA Rule 3210. The SEC note adds the next chapter.

What is noteworthy is that the language of the perception of "unusual social media activity" may be occurring over a multitude of social media tools, mobile applications, and other consumer-oriented communications platforms that have increasingly crept their way into tools that are sanctioned for business use. What was happening on Reddit and YouTube could have just as easily taken place on Signal, Telegram, Discord, WeChat or any other application with a messaging or chat room feature.

Should firms prohibit social media?

So, why don’t firms simply eliminate the social media temptation by prohibiting its use? It’s not that simple when considering the following:

  • Prospective clients prefer to engage on communications platforms with which they are familiar. Growing your business can often mean attracting a new class of investor. In the case of attracting Gen Z clients, you need to engage on Instagram. That is today; tomorrow will likely see the emergence of the next new messaging app
  • Multiple studies have concluded that advisors and broker-dealers who leverage social media gain assets and perform better than those that don’t
  • As we have seen over many years of Smarsh Compliance Surveys, prohibition policies alone rarely work

For financial services firms, the challenge becomes how to increase visibility into remote employee conduct without overstepping personal privacy boundaries into activities that have nothing to do with the firm’s business. As we have previously written, there is no perfect or easy solution, although the combination of policies, training and technologies can help to improve visibility and spot the red flags as indicators that outside business activities may be taking place.

As we see from the SEC note, the actions of the next Roaring Kitty won't be a question of whether it will draw regulatory scrutiny or potential litigation. It will be a question of what steps and measures did the firm take in order to spot illegal activities before harming investors and their firm’s reputation.

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Robert Cruz
Smarsh Blog

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Smarsh handles information you submit to Smarsh in accordance with its Privacy Policy. By clicking "submit", you consent to Smarsh processing your information and storing it in accordance with the Privacy Policy and agree to receive communications from Smarsh and its third-party partners regarding products and services that may be of interest to you. You may withdraw your consent at any time by emailing privacy@smarsh.com.