FINRA, Social Media, & Gamification

By Gabriel Ruzin

The financial industry is an ever-evolving creature, one that constantly invents exciting ways for its customers to move and spend money. By the same token, its very nature necessitates that it also invent new rules and regulations to keep the playing field level for all participants. If this sounds somewhat like the description of a game, it’s because that’s exactly what some servicers are trying to make the industry processes feel like for its more competitive clients. This burgeoning tendency to boil the transfer and trade of billions of dollars worth of stocks, holdings, property, etc. down to ‘points,’ ‘winners,’ and ‘losers’ has regulators and industry experts concerned how this “game” might play out for customers across the board.

Since its founding in 2007, the Financial Industry Regulatory Authority (FINRA) has acted as the New York Stock Exchange enforcement arm and works in league with the SEC to regulate and arbitrate disputes concerning brokerage firms and exchange markets. Recently, FINRA has taken issue with certain online retailers, vendors, and trading applications found on the IOS and Android stores that contain “gamification” tools for users, including point scoring, rules of play, and competitions with other users. During its annual conference on May 19, 2021, FINRA leadership indicated that it will gather public and industry feedback on several problematic ‘game like’ features currently in use across the industry, including whether users are being influenced to make emotionally irrational trading decisions, if users are being repeatedly prompted to make decisions that they otherwise would not, and if the platforms in question are being monitored so as to ensure the customer is following their own best self interest.

FINRA’s key complaint is that the recent surge in new retail investors and online brokers is in danger of overwhelming regulatory oversight and that their new interactive features designed to entice new customers may run afoul of FINRA’s Communications with the Public Rule. FINRA alleges that many of these new ‘broker-dealers’ are not adequately maintaining policies & procedures and that many of their representatives appear to be using impermissible business-related digital communication, including utilizing social media and messaging apps to conduct business with clients.

This contemporary trend to ‘gamify’ vast asset shuffling also calls into account TILA, RESPA, and UDAAP concerns for the SEC and other regulators, as some of these new players scramble to accelerate transparency and disclosure while teetering dangerously close to non-compliance. Brokers inescapably target younger, and less informed, customers to become involved in the industry (while not fully understanding the ramifications of doing so) when they advertise “fun”, points-laden smartphone applications or websites on social media. By treating trading, buying, and selling like a game, brokers and platforms are in serious danger of giving the incorrect - and illegal - impression to prospective clients that the risks involved in sinking money into the financial industry isn’t as serious or dangerous as is widely perceived. It’s up to FINRA (and by extension, the SEC) to sort out how this new movement will be addressed so that all customers can make financial decisions safely and smartly.