This is a very difficult empirical and legal question the SEC faces," said Hu. "One key question is whether user interface design can be considered investment advice and to what extent interface design affects investment decisions at all. Some experts who support regulation concede the SEC is veering into novel territory, noting there is limited research into how digital engagement practices directly affect investor decision-making.įinancial institutions have the best data on the issue but little incentive to share it widely, said Edwin Hu, a research fellow at New York University and a former SEC official. In an October response to the SEC's consultation, SIFMA also said it believes that in the vast majority of interactions, the use of digital engagement practices would not constitute a recommendation, based on "well-established" guidance. Industry groups, including the Securities Industry and Financial Markets Association (SIFMA), say digital engagement practices can be beneficial for investors, for example when they are used to steer them to save more money or invest long term. NOVEL TERRITORY?Īt the time of the meme stock rally, there were more than 100 million retail users/accounts combined open at six of the top online brokerages, Reuters reported last year.Ī survey by the Financial Industry Regulatory Authority (FINRA), which has also stepped up scrutiny of game-like trading features, found that of investors who opened an investment account in 2020, 66% were new to investing. "It could conceivably be a game-changer," said Fischer. That compliance burden would complicate their business and could make them more vulnerable to lawsuits. If the SEC went that route, firms that use digital engagement tools would probably have to make extensive new disclosures. That 2019 rule requires a broker-dealer making a recommendation to act in the best interest of the retail customer and identify conflicts of interest. In an August consultation, the SEC suggested that digital prompts may sometimes constitute an investment recommendation that falls under Regulation Best Interest. On Wednesday, Gensler said in a statement that he was looking forward to the staff's recommendations on digital engagement practices, without elaborating. "Their motivation is to make more revenues." the brokerage apps and the roboadvisors are doing that as well," SEC chair Gary Gensler told CNBC last week. "Americans are bombarded every day by behavioral prompts. This could be a conflict of interest studies show retail investors generally lose money when they churn their portfolio. In a blog post on Tuesday evening, Robinhood said it had added resources to help customers learn investment basics.Ĭritics say commission-free brokers try to maximize retail trading volumes because they earn lucrative fees for routing orders to wholesale market-makers. "It is likely to have a war on its hands."Ĭommission-free brokers say they are democratizing investing, making it easy and fun for anyone to trade. "The SEC has been very concerned that many younger investors, many of them too young to legally drink alcohol, are instead getting intoxicated by digital engagement in the market," said Howard Fischer, a partner at law firm Moses & Singer, adding the industry is likely to push back hard. There are also lively sounds and bright colors, notifications, social networking tools, and curated lists of trading and investment ideas, among other practices. Trading contests, points and rewards are just some of these techniques. The SEC has found that many brokers, as well as roboadvisors, increasingly use analytics driven by artificial intelligence, video game-like features and other behavioral prompts to encourage stock trading or to sell certain products. Robinhood CEO Vlad Tenev and other executives were hauled before U.S. Shares of movie theater chain AMC Entertainment (AMC.N) and other companies also soared.Īt the height of the frenzy, several brokers restricted trading in the meme stocks, infuriating investors. The furious rally pushed GameStop shares up more than 1,500% at one point and created a "short squeeze" that burned hedge funds that had bet against shares of the video game retailer. The Securities and Exchange Commission (SEC) started scrutinizing commission-free brokers like Robinhood, Webull Financial LLC and SoFi Inc (SOFI.O) last year after retail investors drove GameStop (GME.N) and other "meme stocks" sky high in Jan. regulators are studying ways to crack down on psychological prompts used by Robinhood Inc (HOOD.O) and other commission-free brokers to promote frequent stock trading on smartphone apps. WASHINGTON, Jan 26 (Reuters) - A year after the "meme stock" rally humbled hedge funds and roiled Wall Street, U.S.
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