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SPACS and Scams: FINRA Announces New Sweep Exams

FINRA President Robert Cook has announced that FINRA will conduct new regulatory sweeps focusing on three areas:  1) the use of Special Purpose Acquisition Companies (SPACs) to raise money in the markets; 2) social media influencers who publicly give advice on stocks; and 3) the due diligence conducted by member firms prior to the opening of options accounts. 

In a webcast at SIFMA’s Compliance and Legal Virtual Conference, Cook set forth that FINRA is “constantly evolving” which includes FINRA’s “oversight of new business models, new technologies [and] the evolving ways in which investors access the capital markets."  With respect to SPACs, Cook opined that FINRA will focus on “the conflicts of interest that might be there”.  FINRA must focus on SPACs  due to their rise in popularity and the hundreds of billions of dollars they have raised over the last few years.  

FINRA will also seek a sweep in the area of paid social media influencers.  According to Cook, the sweep will focus on "how firms supervise activities and communications related to paid social media influencers".  This seems to come in the wake of all of the social media attention recently paid to GameStop (GME : NYSE) and other stocks, whose  volatility was created by  hordes of retail investors posting  (and acting upon) messages online through various social media sites.   Those posts lead to unprecedented swings in both volume and volatility, and gave rise to the expression “meme stock”.

Cook also indicated that FINRA will conduct a sweep “related to options account opening compliance", focusing in on the "due diligence” being conducted by firms in this area.  This sweep follows on the heels of FINRA’s recent $70 million settlement with Robinhood Financial LLC, which focused in part on the failures to supervise the opening of options trading accounts and the “gamification” of stock trading.

Cook did not reveal any particular time frame for the sweeps, only that FINRA takes the position that even though the financial markets are full of innovation, “compliance with rules in not optional”.  Stay tuned.  If past history is any indication,  we would expect Enforcement actions to come from these sweeps if only so that FINRA can demonstrate continued relevance at a time of tremendous change in how individuals buy and sell securities.

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Authors

Pete S. Michaels

Member / Co-Chair, Financial Services Practice

Pete S. Michaels is a Mintz attorney who focuses his practice on securities litigation, regulatory proceedings involving financial service companies and products, and compliance matters. He represents financial services firms and insurance companies and their employees, directors, and officers.
David L. Ward is a Mintz attorney whose practice includes financial services regulatory matters, internal investigations, and securities-related litigation in state and federal courts. He represents financial services clients before the US Department of Justice, SEC, FINRA, and other regulators.