The Financial Industry Regulatory Authority (FINRA) has recently addressed a growing topic in the financial sector: the metaverse. As more broker-dealers and financial institutions experiment with the metaverse to engage customers, FINRA has clarified that regulatory standards still apply in these virtual spaces.
In its report titled: “The Metaverse and the Implications for the Securities Industry”, FINRA outlines essential considerations for firms that are testing the waters in the metaverse, focusing on communication, supervision, and recordkeeping responsibilities.
FINRA’s guidance stresses that communication rules apply to firms’ virtual interactions just as they do in traditional and digital settings. Firms engaging with clients in the metaverse must adhere to content standards and ensure that all communications are clear, non-misleading, and fully disclose relevant information.
This means that firms must maintain transparency and ensure that investors understand the products or services being offered, no matter if the interaction takes place in a virtual environment or over a phone call.
Since misleading or incomplete information remains a serious regulatory issue, firms are urged to draw from social media compliance practices as a framework.
Supervision: New Challenges in a Virtual Environment
Supervising activities in the metaverse presents unique challenges, yet FINRA expects firms to maintain rigorous oversight of their employees’ interactions.
Virtual offices and metaverse workspaces could theoretically offer improved monitoring tools, allowing firms to record and review client interactions, training sessions, and meetings centrally.
This centralized oversight could assist firms in meeting regulatory obligations. However, it also requires that firms set specific policies, adjust their supervisory practices, and train employees on compliant behavior in the metaverse.
One potential advantage the metaverse offers is the capability to enhance recordkeeping. FINRA’s report notes that firms could use the virtual space to streamline how they record interactions, disclosures, and presentations to clients.
Virtual platforms can create real-time records of conversations and decisions made with clients, which could simplify compliance with existing recordkeeping standards.
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FINRA and the SEC (Securities and Exchange Commission) are exploring new requirements for digital records that could enable firms to move away from traditional “write once, read many” (WORM) formats in favor of a more flexible and integrated audit-trail approach.
Concerns over privacy
While the metaverse offers novel ways to interact and visualize financial information, it also introduces potential risks. FINRA has raised concerns over privacy, data protection, and cybersecurity within virtual environments.
The complexity of these risks is compounded by the need to comply with anti-money laundering (AML) and know-your-customer (KYC) regulations.
To help address these issues, FINRA is actively seeking feedback from market participants and financial firms on their use of the metaverse, allowing regulators to stay informed and identify areas for additional guidance as the technology evolves.
As financial firms continue to explore the metaverse, regulators like FINRA and the SEC are likely to issue further guidance on how these virtual activities should be regulated.
At this stage, FINRA’s approach mirrors its stance from previous technological transitions, like online brokerage and social media, emphasizing that virtual settings do not exempt firms from compliance obligations.
