Over the past few weeks, retail investors have pressured the financial markets. After convening a high-level meeting, regulators of those markets concluded they held firm.

Despite some gut-churning days watching the value of formerly ho-hum stocks GameStop and AMC Entertainment Holdings spike and then plummet, Treasury Secretary Janet Yellen and the heads of four financial regulatory agencies met Thursday to discuss the frenzy and concluded the “core infrastructure” of the market “was resilient.”

Included in the meeting was leadership from the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Federal Reserve Bank, and the Federal Reserve Bank of New York.

“It is imperative to uphold the integrity of these markets and ensure investor protection,” Yellen said in a statement released following the meeting.

A group of retail investors, egging themselves on in Reddit chat rooms and on social media, launched a stock buying spree in late January. Using apps like Robinhood, the retail investors pushed up the value of several moribund stocks as much as 500 percent higher than their previous value. The idea was to make quick money but also to punish large hedge funds, like Citadel, which had made bets predicting the value of the stock would fall. Some hedge funds lost billions of dollars trying to cover their short sell bets as the stock value of GameStop, AMC, and BlackBerry spiked.

The value of those stocks has since declined dramatically, although not yet to the levels they were at before the frenzy occurred.

Yellen said the meeting focused on “market functionality and recent trading practices in equity, commodity, and related markets.” She said the SEC and CFTC are “reviewing whether trading practices are consistent with investor protection and fair and efficient markets.” This comes as the SEC and CFTC each said they were monitoring the market volatility.

In previous reports on investigations, the SEC has included findings on issues that have roiled the market.

“Observers can glean hints from these reports how the agency may intend to pursue potential enforcement actions,” said John Jascob, associate managing editor for the Securities Division at Wolters Kluwer Legal & Regulatory U.S.

In 2017, the SEC warned in an investigative report that “virtual” organizations offering digital currencies are subject to the requirements of federal securities laws. The SEC concluded digital tokens offered and sold by a virtual organization called “The DAO” were actually securities.

In 2012, the SEC examined whether Netflix CEO Reed Hastings had violated Regulation Fair Disclosure (Reg FD) when he announced on Facebook that Netflix surpassed one billion hours of viewing for the first time. The Facebook announcement caused a noticeable bump in Netflix’s stock price at the time. The SEC issued a report in 2013 reminding companies Reg FD applies to social media and other forms of emerging communications, just as it does to statements made on the company website.

Both the SEC and CFTC are currently led by acting leaders. President Joe Biden has nominated former CFTC Chair Gary Gensler to lead the SEC, but his confirmation hearing before the Senate has not yet been scheduled. Biden has not yet announced his nominee to lead the CFTC.

Experts said the SEC investigation into the volatility could follow several paths. It could review the thousands of social media posts by retail investors, attempting to determine if the buying frenzy was a new version of a boiler room, pump-and-dump stock scheme.

More likely the agency will seek to determine whether the actions of regulated entities contributed or benefitted from the sudden interest in particular stocks. The agency may comb through social media posts looking at whether employees of regulated entities were involved in attempts to manipulate stock prices.

The agency will also likely shine a spotlight on the motivation of Robinhood to halt trading by its users in some of the most volatile stocks because it did not have enough funds to cover the huge volume of trades. Several Robinhood users have sued. But experts say the SEC may be more interested to know if any regulated entities encouraged the Robinhood trading pause, or perhaps benefitted from it.

The Commission may also decide to issue rulemaking on short selling, which was the impetus for at least some of the retail investors to suddenly buy certain stocks.

Experts said the SEC could issue rules that would make short selling less attractive, by layering on additional reporting requirements that require short sellers to meet additional capital or other suitability requirements, capping short interest, or restricting trading in heavily shorted names.

Aaron Nicodemus covers regulatory policy and compliance trends for Compliance Week. He previously worked as a reporter for Bloomberg Law and as business editor at the Telegram & Gazette in Worcester, Mass.

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