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Law360 (May 19, 2020, 6:47 PM EDT) -- Top executives with the Financial Industry Regulatory Authority said on Tuesday they have seen significant upticks in market manipulation alerts and fraud reports amid the COVID-19 pandemic, noting that letters and notices from the regulator are forthcoming as they look to keep abuses in check.
Speaking on a webcast hosted by the Securities Industry and Financial Markets Association, Thomas Gira, FINRA's executive vice president of market regulation and transparency services, noted that the pandemic spawned up to 200% increases in alerts related to best execution, pricing issues and what he referred to as the "micromanipulation" of markets, including so-called wash sales, spoofing and layering.
"Because of the volatility, we did experience a significant increase in alerts in a variety of areas," Gira said. "I think unfortunately there are probably going to be letters and things coming out based on what has come out through the system."
Gira advised firms to keep an eye on the agency's report card system, which highlights alerts and is meant to assist firms with compliance issues. He also noted that the agency is currently focusing on zero-commission business models and has a sweep exam open to look at a "variety of firms" with these models.
"Zero commissions are not inherently by themselves a rule violation," he noted. "We want to make sure that … at the end of the day the customers are still receiving best execution. We're looking at how those decisions are made, has the quality remained the same, and really just making sure the customers aren't being compromised."
The comments came as part of a discussion of the impacts of the COVID-19 pandemic, the abrupt changes it has brought and how the agency is dealing with them. Head of enforcement, Jessica Hopper, highlighted that much of the fraud stemming from the virus has been related to alleged vaccines, cures and testing.
She said FINRA has referred cases falling out of its jurisdiction to the U.S. Securities and Exchange Commission, which has issued a number of trade suspensions as a result, while her in-house focus is on protecting seniors and other vulnerable individuals while obtaining restitution for harmed investors whenever possible.
"We're certainly looking at firms or individual representatives that are promoting and selling products that are on their face not legitimate," she said. "My focus in particular is looking at the most vulnerable customers and the retail customer base … who are most easily taken advantage of by the folks in the industry who don't want to get it right, and aren't here for any of the reasons that the vast majority are in it for."
Robert Colby, FINRA's chief legal officer, echoed those thoughts, adding that there's a "big focus on seniors," especially since older people hold most of the wealth at brokerage firms.
"[That's] not necessarily people who aren't competent," he said. "But unfortunately there is this tragic process where people can lose their sharpness and they lose their judgment abilities and become more vulnerable to people who prey on confusion or loneliness or other sad factors."
As the legitimate firms adjust to remote work, the agency is also currently putting together a regulatory notice that will pool the firms' feedback, with an upcoming release in the next two to three weeks, said Bari Havlik, executive vice president of member supervision, sharing some positive insight into how firms have coped.
"Firms have adjusted reasonably well, and we have found that a lot of firms have communicated with risk monitoring analysts on changes they're making to evolve workforces to be fully remote," she said.
Gira, despite his comments regarding the spike in market manipulation, had some positive news to share of his own, noting that compliance with various trading rules — including those pertaining to locked and crossed markets and trade-through regulations — had held firm at the "99.9% level." Late trade reporting hasn't been impacted at all by the virus, with just 0.1% of trades coming in late, he added.
"I've been really, really pleasantly surprised by compliance rates across the market," Gira said. "When you're in times of extreme volatility and price discovery is very important, it's important that the markets are producing good information."
--Editing by Jack Karp.
For a reprint of this article, please contact reprints@law360.com.
