alerts & publications
SEC and FINRA Signal Enhanced Oversight of Online Trading Platforms3月 23, 2021
Earlier this month, the Securities and Exchange Commission (SEC) announced its examination priorities for 2021.1 SEC Examiners will focus on, among other things: Regulation Best Interest,2 FinTech, trade recommendations made in mobile applications, order-handling, and operational disclosures. The SEC’s Division of Examinations will assess whether broker-dealers are “making recommendations that they have a reasonable basis to believe are in customers’ best interests,” and evaluate “broker-dealer processes for compliance and alterations made to product offerings.”
The SEC’s examination priorities closely align with those that Financial Industry Regulatory Authority (FINRA) announced last month. FINRA’s priorities include oversight of app-based and online trading platforms’ communications, recordkeeping, and risk management practices. FINRA specifically highlighted the “risks associated with app-based platforms with interactive or ‘game-like’ features that are intended to influence customers, their related forms of marketing, and the appropriateness of the activity that they are approving clients to undertake through those platforms.”3 The so-called “gamification” of retail trading apps is also being scrutinized by other agencies and regulators.4
To be prepared for SEC and FINRA examinations, firms should evaluate and confirm that they have:
- Implemented and are maintaining policies and procedures to address conflicts of interest, Regulation Best Interest, and business-related firm communications;
- Evaluated disclosures concerning conflicts of interest, particularly those associated with terms of service and recommendations to retail customers;
- Documented their efforts to comply with Regulation Best Interest and FINRA rules addressing suitability (FINRA Rule 2111) and the collection and retention of required customer information, both at account opening and subsequently (FINRA Rules 2090, 2360, and 4512);
- Made operational disclosures that comport with current practices and functionality;
- Handled orders consistent with customer instructions and Best Execution obligations (FINRA Rule 5310); and
- Provided fair and balanced communications without false, exaggerated, or misleading statements, as required under FINRA Rule 2210.
Firms also should evaluate whether certain features of online trading platforms and mobile applications may incentivize particular transactions, and whether current compliance policies and procedures address the potential risks associated with those features.
1 SEC, “SEC Division of Examinations Announces 2021 Examination Priorities” (Mar. 3, 2021) available at https://www.sec.gov/news/press-release/2021-39 utm_medium=email&utm_source=govdelivery.
2 Regulation Best Interest (17 C.F.R. § 240.15l-1), adopted in 2019, requires broker-dealers and associated persons to act in the best interest of a retail customer when making securities and investment strategy recommendations. The best interest standard encompasses four obligations:
- (1) providing required disclosures before or at the time of any recommendation,
- (2) exercising reasonable diligence, care, and skill in making a recommendation,
- (3) establishing, maintaining, and enforcing policies reasonably designed to address conflicts of interest, and
- (4) maintaining policies and procedures to comply with Regulation Best Interest.
3 “2021 Report on FINRA’s Examination and Risk Monitoring Program” (Feb. 1, 2021) available at 2021 Report on FINRA’s Examination and Risk Monitoring Program | FINRA.org.
4 For example, the Enforcement Section of the Massachusetts Securities Division of the Office of the Secretary of the Commonwealth sued Robinhood Financial LLC in December 2020 alleging, among other things, that Robinhood “use[s]  strategies such as gamification to encourage and entice continuous and repetitive use of its trading application….” In the Matter of Robinhood Financial, LLC, Docket No. E-2020-0047, Complaint, at p. 2 (December 16, 2020), available at: https://www.sec.state.ma.us/sct/current/sctrobinhood/MSD-Robinhood-Financial-LLC-Complaint-E-2020-0047.pdf. Robinhood is contesting the allegations.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Nicole M. Argentieri, an O'Melveny partner licensed to practice law in New York, Andrew J. Geist, an O'Melveny partner licensed to practice law in New York, Mia N. Gonzalez, an O'Melveny partner licensed to practice law in New York, Steven J. Olson, an O'Melveny partner licensed to practice law in California, Jorge deNeve, an O'Melveny counsel licensed to practice law in California, Jamie Quinn, an O'Melveny counsel licensed to practice law in California, and Emma Tehrani, an O'Melveny associate licensed to practice law in the California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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