SDDco Perspective Newsletter

The GameStop Saga Applies To All Of Us - But Not The Way You Think It Does

Gary Fox
Director, Business Development

Gary Fox

The financial industry, its regulators, and the rest of the planet have been watching the events of recent days with GameStop and other securities with great interest. As of late Thursday, January 28, 2021, the story has developed a new wrinkle that should cause every Chief Compliance Officer and supervisory principal to dust off their copies of FINRA’s Regulatory Notice 10-06 and subsequent guidance.

According to numerous news agencies, and as reported on Nasdaq.com, a central character in the run-up of stocks like GameStop is alleged to also be a registered representative of a well-known broker-dealer. Various news articles also claim he is an advisor, a former advisor, a financial educator; and other roles. We will not name the person or the firm (they are named in the Nasdaq post), but at the time of writing of this article, the person’s registrations are still active in BrokerCheck.

Paraphrasing Nasdaq.com:

“…the person behind the Roaring Kitty YouTube streams which, along with a string of posts by Reddit user Deep*******Value, helped attract a flood of retail cash into GameStop, burning hedge funds who had bet against the company and roiling the broader market.

His social media messages and videos repeatedly made the bull case for the beleaguered bricks-and-mortar retailer and shared images of his trading account profit on the stock, sparking a following of like minded GameStop enthusiasts.”

British news organization, The Daily Mail, earlier on Thursday identified both Roaring Kitty and Deep*******Value as being the same person, which appears to have been corroborated by Roaring Kitty’s brother.

What does this mean for you?

FINRA has long held that posts made in a public forum by registered persons are the responsibility of their supervising firm. In Regulatory Notice 10-06, FINRA stated:

Q2:If a firm or its personnel recommends a security through a social media site, does this trigger the requirements of NASD Rule 2310 (FINRA Rule 2111) regarding suitability?

A2:Yes. Whether a particular communication constitutes a "recommendation" for purposes of Rule 2310 will depend on the facts and circumstances of the communication. Firms should consult Notice to Members (NTM) 01-23 (Online Suitability) for additional guidance concerning when an online communication falls within the definition of "recommendation" under Rule 2310 (FINRA Rule 2111).

As far back as 1996, NASD Notice to Members 96-50 stated the following:

NASD Regulation, Inc. (NASD Regulation) recently has observed a correlation between sharp increases in the volume of electronic messages relating to certain low-priced securities and dramatic increases in the price, volatility, and volume of these securities. Often, these messages are sent without attribution to a large, undifferentiated universe of Internet or on-line subscribers and contain unverified or unverifiable information concerning the merits of particular securities. This development, along with the potential that associated persons may use the Internet or other electronic media to communicate messages concerning particular securities to the investing public, raises important regulatory issues.

…we are issuing this Notice to Members to emphasize to members their supervisory and regulatory responsibilities, as well as their obligations to customers, when dealing with stocks promoted on the Internet or other electronic media, and their supervisory obligations with respect to the use of such media by their associated persons.”

It is unknown at this time whether Roaring Kitty’s broker-dealer knew of his activities, or what the firm’s overall policies were in relation to social media disclosures, etc. It appears, but is not confirmed, that Roaring Kitty’s posts did not reference his employment with a broker-dealer.

What are the liabilities for a broker-dealer who is unaware of their associated persons’ activities?

This is a gray area, but in 1999 Merrill Lynch was sued by a group of individuals, some of whom were not even Merrill customers, for the actions of two representatives of the firm. The two persons in question had been using pseudonyms to disguise their identities while promoting certain stocks on online message boards and forums. After losing money on some of these recommendations, forum participants somehow discovered the association with Merrill Lynch and requested restitution for the bad advice. Merrill initially told the group that the actions of the registered persons were outside of the scope of their employment with Merrill and, since intentionally hidden from Merrill’s view, not the firm’s responsibility. The NASD disagreed and found Merrill to still be liable. At the core of their argument was that Merrill appeared to never have addressed the issue overall with any of its employees at large, and lacked supervisory procedures outlining permissible behavior.

What should I do?

  1. Review your Written Supervisory Procedures for what is considered permissible behavior in a public forum, social media setting, blog posts, etc.
  2. Ask yourself:
    1. Is this clear to everyone?
    2. Does everyone at the Firm know these are the guidelines?
  3. Take steps now to communicate and remind your Firm that any time an associated person makes a comment about securities, investing, etc., it is considered a public appearance and subject to FINRA rules.
    1. This applies to all scenarios, intended or not.
    2. Many firms have prohibitions on discussing securities in personal settings for this very reason.

Contact us if you wish to further review your procedures for coverage, clarity, and focus.

We will continue to watch the developments of the GameStop saga. The current focus of the news is mainly on the actions of other involved entities, but Roaring Kitty’s activities will surely be reviewed thoroughly by the SEC. Events of this scale offer excellent learning opportunities for each of us. As always, you can count on our team here at The SDDco Group to share our experience with you as we navigate these fascinating days.

NASDAQ- Famed GameStop Bull Roaring Kitty Is A Massachusetts Financial Advisor
FINRA Regulatory Notice 10-06: Guidance on Blogs and Social Networking Websites
FINRA Regulatory Notice 17-18, Social Media and Digital Communications
FINRA Rules 2210. Communications with the Public
Notice to Members 96-50, Supervisory And Other Obligations Related To Use Of Electronic Media
Notice to Members 01-23, Suitability Rule and Online Communications

Questions? Or have an article recommendation? Let's connect!

LinkedIn

Forward to Friend

SDDCO RIA Registration & Compliance
Speak with our RIA Registration and Compliance Specialists

We will support your firm’s ongoing compliance with the Investment Advisers Act and associated state requirements including:

  • Administering your IARD profile and all ADV amendments
  • Maintaining and updating your Compliance Manual
  • Reviewing all marketing and performance materials
  • Developing Solicitors Agreements and Disclosure Statements
  • Conducting Annual Reviews
  • Guiding you during regulatory exams
  • Drafting responses to regulators

SDDco SERVICE OF THE MONTH:

Broker-Dealer Membership and Compliance

The SDDco Group, through its subsidiary, SDDco Regulatory Services provides full-service compliance consulting to both new and established broker-dealers (BDs) and Investment Advisers (IAs). This month, we are highlighting our broker-dealer practice.

What Services Do We Provide To BDs?

Our team of experienced consultants assist BDs seeking:

  • Ongoing regulatory compliance advice and support
  • CRD Registration Services
  • A qualified Series 24 registered consultant to serve as the designated Chief Compliance Officer (CCO) or other Principal roles
  • FINRA New or Continuing Membership Applications, Materiality Consultations, and Membership Agreement Changes

Why Should You Hire an SDDco Compliance Consultant for Ongoing Compliance Support?

We are experienced in providing ongoing support to broker-dealers of many stripes and sizes and our services are highly specialized. Our consulting team understands the business implications of complying with industry rules. We use that lens to determine the best advice for our client partners on how to remain compliant. SDDco-RS offers a suite of compliance services on a retainer or project basis which always encourages frequent communication with our clients.

Why Should You Hire an SDDco Compliance Consultant for FINRA Membership Applications?

FINRA New Membership Application (NMA) requirements are extensive and exacting. SDDco Regulatory Services shepherds the entire process. Success hinges on understanding the client’s business, developing a clear and consistent presentation to the regulator and formulating appropriate responses to FINRA information requests. Our consultants are skilled and uniquely experienced in this meticulous process, having represented hundreds of firms of varying size and structure. SDDco-RS also assists with the FINRA Continuing Member Application (CMA) process as it relates to changes in your current business.

Learn More by Downloading Our Broker-Dealer Membership & Compliance Services Brochure

DOWNLOAD >
Accounting Services Brochure

SDDco Group makes this general information available for educational purposes only, the contents of which were not originated from SDDco. SDDco is not affiliated with any of the publishing persons or entities of the articles herein. The information provided should not be construed as legal advice. This email may constitute an advertisement under U.S. law.

www.sddco.com| info@sddco.com| (212) 751.4422