In a continuing series, “Knocking on Government Doors”, Irene Liu, the CLO at Hopin, shows how proactive engagement can help companies deal effectively with their government strategy
Given the potential benefits to early and proactive engagement with government regulators, you now may be now ready to knock on government doors. But on whose doors should you knock? And how should you prepare for your meetings with these regulators?
If you’re pondering which regulator you should proactively approach, think carefully about your company and your key products. What drives your companies’ revenue and bottom line? Are there any new products that will be launched in the future which will impact your bottom line?
Most likely, your company has a few core products that generate revenue now or in the future. For most of these products, you should be able to point to which regulations potentially impact them; and once you know that, you can figure out the regulators on whose doors you should knock.
Remember, if you can go in early to meet these regulators before you’re asked to, you might gain the chance to vet your products, influence new policies and programs, potentially collaborate with regulators, or explain to them how certain laws do or do not apply (or should not apply) to your product.
Since any new regulations can potentially make or break the success of your product and your business, it’s important to get ahead of any issues that might impact your products’ success, and potentially disastrous if you don’t.
Lessons from Robinhood
Robinhood is a fintech company that’s best known for its commission-free investing mobile app, which allows consumers to trade stocks completely for free. Robinhood recently launched a shockingly high interest rate checking and savings product for consumers that offered a 3% interest rate. The news shocked the banking industry and garnered a lot of media attention because Robinhood’s no-fee checking and savings products offered three-quarters of a point higher than the next-best available rate and thousands of time higher that most big banks. These products, however, were not FDIC-insured; although Robinhood clarified that funds from this no-fee checking and savings account would be fully protected by the Securities Investor Protection Corp (SIPC), an agency that oversees brokers-dealers, instead of the FDIC, the federal agency that protects bank account holders’ deposits up to $250,000.
Given that this is a high-visibility launch of a key product expanding Robinhood’s product scope, it would have been wise for Robinhood to engage with the SIPC proactively to ensure that these funds surely would be protected by the SIPC, as they declared in their marketing materials. But it soon became apparent that Robinhood had not reached out to SIPC before launching these products.
Immediately after launch, SIPC CEO Stephen Harback said that he had serious concerns about Robinhood’s product because they did not adequately protect consumers’ money. He further clarified that the “SIPC does not protect checking and savings accounts since the money has not been deposited for a protected purpose.” Harback also confirmed that Robinhood never reached out to anyone at the SIPC. While it wasn’t legally required for Robinhood to reach out to SIPC proactively, had they reached out earlier, they would have avoided the all the scrutiny that later followed and led to an epic failed launch.
Given this mishap — which led to confusion about how investors’ money would be protected just one day of launching this product — Robinhood quickly said that it will re-launch and re-name the product. Robinhood’s founders also acknowledged in its company blog that their no-fee checking and savings account “may have led to some confusion”. The company also said that they are now “committed to work[ing] closely with regulators as [they] prepare to launch [their] cash management program.”
While Robinhood’s action may be a smart move in the right direction, it may be too late. Seven U.S. senators already sent a letter to the Securities and Exchange Commission Chairman Jay Clayton, the SPIC, and the FDIC after Robinhood’s launch debacle with concerns about Robinhood’s products. The senators expressed concern that ” re-branding Robinhood’s original announcement to cash management may simply be a way to circumvent regulatory scrutiny without offering full transparency to its customers.”
Despite the desire to move fast and disrupt traditional industries, Robinhood’s experience should be a cautionary lesson for companies to take heart — that while not legally required, it can be beneficial to proactively engage with regulators and vet your key products and any new product launches, ideally before launch. Otherwise, you may suffer the same folly as Robinhood and weaken the reputation of your company and your future product launches.
A Word of Caution: Think carefully before engaging criminal enforcement agencies
While it’s important to proactively engage with civil agency regulators of your key products, you should think carefully before engaging with any law enforcement or criminal enforcement agencies.
The FBI, state police, and local law enforcement are primarily investigative agencies and their primary function is law enforcement. So, if a company comes in proactively to meet with them, they’ll mainly want to understand what data you collect (such as users’ GPS information, subscriber information, and messaging content) and how they can obtain such information for investigative purposes. Therefore, the more they know about your products and the type of data you collect, the more likely that you’ll receive an increasing number of subpoenas and court orders requesting your companies’ user data.
Obviously, it’s important to comply with such law enforcement requests, but there is no need to turn their attention toward your company by proactively engaging with these criminal enforcement agencies and sharing the types of user information in your systems.