Market headlines have been dominated by a Reddit forum scheming to inflate GameStop’s stock price for no other reason than to punish short sellers who made big wagers the company would soon crash and burn. What this means for GameStop—which is saddled with an aging business model and drowning in uncertainty—and the bearish hedge funds who lost billions betting against is not yet entirely clear.
However, what is more apparent is that the wealth management space should expect regulatory fallout from this mini-market crisis. The Reddit-fueled "short squeeze," coupled with the seemingly endless supply of online collaboration platforms (including and beyond just Reddit), as well as potential surveillance challenges related to the industry’s mass migration to a remote-work model, could spark a renewed level of scrutiny among regulators at the SEC and Finra.
Get Ahead Of The Curve Before It’s Too Late
The ability of firms to track who their employees and financial advisors are talking to, what they are talking about and what channels they are using for communication will become even more important than ever. The Reddit-GameStop affair will generate greater urgency for firms to close whatever visibility gaps may exist related to the digital communications and collaboration conduct of their employees and affiliated professionals. Here's what firms need to do to get ahead of this curve:
• Dive much deeper with firm-wide policies. Firms need to explicitly address which digital platforms are acceptable for business purposes, including use of data that is disseminated on such platforms, including Reddit. Equally important, be sure to define the consequences for anyone who uses a prohibited channel. Similarly, ensure that conduct codes are sufficiently expansive to address conduct that can arise from any situation, whether it's around a water cooler, in a conference room or an online chat room. In today's work-from-anywhere environment, firms need to be especially mindful of making these changes.
• Upgrade training programs to capture up-to-date context on today’s digital communications landscape. Put in place programs that reflect the specific set of features that each approved collaborative tool provides, as well as the role of the individual depending on whether they are regulated or non-regulated, client-facing or a back-office employee, etc. A central focus of any updated training program should be making it clear which platforms employees and advisors can use for business purposes and which, if any, they can use for personal reasons.
• Adopt and expand technologies that enable scalable, cost efficient and effective compliance surveillance. Expand the use of supervisory control systems beyond regulated user pools (e.g., broker-dealers and investment advisors) to other professionals within or affiliated with the firm. That would include anyone with access to high-value or sensitive information, or anyone with a history of misconduct (and anyone who has the same function or frequently interacts with those who do).
Meanwhile, firms should also implement the latest supervisory tools. Today's platforms—whether it's Twitter, Slack, Discord, Reddit or others—make it easier than ever to share investment information. At the same time, each of them contains reams of unique, unstructured content—which means the ability to decipher the context of the conversations that take place within these channels is virtually impossible without artificial intelligence and machine learning-driven technologies.
Beware Of Future Reddit Black Swans
While the industry includes many of the most highly regulated businesses in the country, it’s a smart bet that the level of scrutiny will only rise in the coming years—not only due to the rogue-like actors that left many prominent hedge funds bruised and beaten, but also thanks to the proliferation of technology tools.
To be clear, none of the above steps will address all the problems posed by every dark corner of the internet that can be manipulated in today’s environment.
But, if followed, these steps can help firms mitigate the significant damage and consequences that could be caused in the future by an employee or affiliated professional who seeks to exploit the same set of conditions that led to a Reddit forum taking over the market for a few days.
Robert Cruz is vice president of Information Governance at Smarsh, the global technology leader in digital communications compliance.