September 19, 2021

Volume XI, Number 262

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Game On: FINRA Hints at Upcoming Gamification Sweep

During a May 19, 2021 webcast at the Financial Industry Regulatory Authority’s (“FINRA”) annual conference, Amy Sochard, FINRA’s Vice President of Advertising Regulation, indicated that the organization will seek public feedback on gamification practices utilized by some stock trading platforms to attract investors with a view toward issuing new rules or guidance.  “Gamification” refers to the application of typical elements of game playing, such as point scoring, competition with others, and rules of play, by trading platforms, online retailers or vendors to encourage engagement with a product or service.

Sochard’s comments regarding soliciting industry feedback coupled with a warning to conference attendees to look out for further communications from FINRA on the topic suggests an imminent market sweep.  Other conference speakers indicated that any future rulemaking, guidance or regulatory action regarding gamification would be undertaken in conjunction with the U.S. Securities and Exchange Commission (“SEC”).

To gather industry information, FINRA often issues targeted exam or “sweep” letters to chosen firms engaging in a particular business activity.  A FINRA gamification sweep would likely focus on several areas:

  • Do communications to users constitute a “recommendation” such that the broker-dealer is required to act in the customer’s best interest and comply with Regulation Best Interest and Form CRS?

  • Are users being influenced to make emotional rather than rational trading decisions, either through rewards, leaderboards or direct comparison to other customer’s performance or activity?

  • What kind of prompts or nudges do customers receive from the platform? Are these prompts educational or positive?  Are they designed to influence good decision making?

  • How are firms disclosing risks, fees, costs, conflicts of interest and standards of conduct to customers?

  • How is the firm complying with customer account opening requirements, including KYC and the customer’s risk profile?

  • How is the firm supervising and monitoring communications to its customers?

  • What type of governance process has the firm implemented to supervise the platform?

  • How is the firm thinking holistically about customers’ use of the platform and its ultimate impact on their investments?

Sochard’s comments track with efforts by both FINRA and the SEC to protect investors from gamification tactics that may lead inexperienced investors to take unnecessary risks.  Both regulators have exacted enforcement settlements from a major gamification platform, Robinhood Financial, LLC, for best execution violations and related supervisory failures.  FINRA is currently investigating how Robinhood displays cash and buying power to customers and its options trading approval process.  In addition, FINRA’s 2021 Exam Priorities identified “risks associated with app-based platforms and 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.”  FINRA further advised brokerages to review “game-like” features within their trading apps and any related marketing for compliance with Regulation Best Interest and sufficient risk disclosures.

FINRA’s full foray into the gamification game makes eminent sense given the potential sales abuses posed by an appeal to investors’ natural attraction to competition.  The specific attention devoted by FINRA to gamification during its annual conference and Exam Priorities Letter, and its link up with the SEC should be viewed by brokerage firms with gamification business lines as a summons to make sure they “got game” when it comes to oversight and compliance, especially when it comes to gamification sales practices.

Copyright © 2021, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XI, Number 152
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About this Author

Sarah Aberg Government Contracts Attorney Sheppard Mullin Law Firm New York
Special Counsel

Sarah Aberg is special counsel in the White Collar Defense and Corporate Investigations Group in the firm's New York office.

Areas of Practice

Sarah's practice encompasses litigation, internal investigations and white collar defense, with a focus on financial services and securities. She has conducted multiple criminal trials and numerous internal investigations into a wide variety of allegations, including mail and wire fraud, mortgage fraud, insider trading, market manipulation, money laundering,...

212-634-3091
Shane J. Killeen Corporate Attorney Sheppard Mullin San Diego, CA
Attorney

Shane Killeen is an attorney in the Corporate Practice Group in the firm's San Diego (Del Mar) office. He is a member of the Due Diligence team. 

Areas of Practice

Shane assists clients in a variety of transactional matters, including mergers and acquisitions, renewable energy project finance, and general corporate transactional and governance matters.

PRACTICES

  • Corporate
    • Due Diligence
    • Mergers and Acquisitions
858.876.3513
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