Lessons Learned From Broker Involved In GameStop Short Squeeze

March 18, 2021by Smarsh

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The widely publicized GameStop short squeeze incident continues to have a ripple effect throughout the market. In the broader sense, the whole event has become a David and Goliath-style parable. A group of everyday retail investors on Reddit and YouTube taking down powerful institutional investors. But there’s more to the story. When examined more closely, this may have deeper implications for regulated financial organizations.

It’s not a stretch to consider that a financial shakeup like what happened with GameStop could involve financial services employees. In fact, one of the central figures in the incident was a social media influencer with the handle Roaring Kitty, who happened to be a registered financial broker. Roaring Kitty, whose real name is Keith Gill, is no longer a licensed broker after his firm, MML Investors Services LLC filed a termination request due to an ongoing internal review of outside business activities (OBA).

The trading frenzy quickly prompted a regulatory response, elevating the importance of supervision. FINRA’s Risk and Exam Priorities report highlighted the responsibility for firms to monitor employees for outside business activities (OBA) to adhere to FINRA Rule 3210.

The perfect storm for outside business activities

The pandemic may have paved the way for this to happen as financial firms have less visibility into the actions of their employees. Individuals are 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.

In this case, the involved party was a registered broker, but it could just as easily have been an executive team member or someone in the back office. And beyond overt market misconduct, this could have been any form of employee misbehavior, including the violation of another regulatory requirement or a security issue like intellectual property loss.

Remote working has been critical to business continuity and its success has prompted many companies to prioritize it operationally into the future. How can you put adequate oversight procedures and technology in place to monitor communications and proactively avoid employee misconduct?

How to protect your firm from OBA risk

In this video, Robert Cruz explains the many dimensions to the GameStop issue and the implications for regulated organizations of having an employee involved in outside business activities or other misconduct. He discusses:

  • The factors that led to the market manipulation
  • What could have been done sooner to avoid issues for the firm
  • How to strengthen supervisory mechanisms to inspect for OBA and other misconduct

The GameStop market maelstrom is just one example of what can happen when registered employees are not properly supervised. Financial organizations must have a plan to mitigate similar regulatory risks to avoid financial penalties, legal trouble or brand-damaging headlines.

v-play-btnFuture proof compliance Robert Cruz thb

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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.