How the GameStop Short Squeeze Escalates Compliance Risks

In fact, he was an employee of a large financial services company for much of this time (he quit recently) and was a chartered financial analyst who had passed his FINRA Series 63, 65, 7 and 3 exams.

That means he promoted GameStop online while maintaining a significant personal position, despite the stock having little fundamental value, mostly while he was a member of the financial services industry. Is there any wonder that the SEC and other regulators are now actively investigating this matter?

Reputation, Firm Risk, Financial Loss

It remains to be seen whether Gill's actions are attributable to regulatory oversight shortcomings. But there are undoubtedly reputational issues at play.

For one, his participation in chat rooms and message boards laden with racist, homophobic and obscene language was a poor reflection on his former employer. Moreover, it's never a good thing when an employee — even if they have departed — enjoys financial gains at the expense of their firm, to say nothing of its clients.

Lessons for Wealth Management

These are serious matters. It will be necessary for firms to take a holistic view across employee and financial advisor trading and communications, develop more robust supervisory and surveillance technologies, and close the visibility gaps for regulated and non-regulated staff.

In particular, wealth management firms need to ask themselves:

• Do we know for sure that none of our advisors or employees is engaged in situations like GameStop?
• What if those on Reddit, Signal and WeChat are licensed advisors operating under screen names or have set up outside business entities to make transactions?
• How confident are we in our ability to monitor our advisors' social media activities?
• How effective are our efforts to monitor outside business activities and identify any connections to our own? (The importance of monitoring outside business activity was just highlighted in FINRA's 2021 Examination and Risk Monitoring Program notice)
• Aside from potential regulatory infractions, are there other ethical issues to worry about?
• And most importantly, would we have caught on to this activity if Gill were an advisor or an employee?

Forget the Populism Narrative

The GameStop affair is not the clear-cut, Joe six-pack versus wealthy Wall Street hedge fund manager story that many have described.

Even so, what is apparent is that financial firms will face growing pressure due to this matter. That will shine a spotlight on advanced technologies that augment internal teams, provide greater visibility into communications and better prepare firms for more intense regulatory scrutiny.

Stephen Marsh is founder and chairman of Smarsh, the global company in digital communications compliance for wealth management firms and financial institutions.