SEC Hints at Tougher Online-Broker Rules Over Game-Like Features
Bloomberg – The U.S. Securities and Exchange Commission sent its strongest signal yet that it plans to toughen rules for online brokers, issuing a wide-ranging request for comment on how the firms use game-like features and other tools to attract customers.
In a Friday statement, the Wall Street regulator said it’s seeking information from market participants, consumer advocates and others on “digital engagement practices” that are closely associated with the mobile phone apps offered by brokers such as Robinhood Markets Inc. and Webull Financial. The SEC said it’s concerned that such technologies are putting investors at risk by encouraging excessive trading and pushing specific stocks.
The move is the latest from Washington regulators to get a better handle on the increasing force that retail investors are playing in equity markets. Several U.S. lawmakers have urged the SEC to crack down on brokers that cater to millennial and other novices who embraced trading during the pandemic, following this year’s wild volatility for meme stocks.
“While new technologies can bring us greater access and product choice, they also raise questions as to whether we as investors are appropriately protected when we trade and get financial advice,” SEC Chair Gary Gensler said in a statement. “In many cases, these features may encourage investors to trade more often, invest in different products, or change their investment strategy.”
The issue of gamification — where brokers use nudges and prompts on their apps to keep customers more engaged — has been mainly linked to Robinhood in the investing world. But the practice has spread to many online brokers and firms that feature do-it-yourself investment options, known as robo-advising.
Shortly after taking over as SEC chief, Gensler told the House Financial Services Committee in May that many trading rules may need to be updated to account for new technologies. This week, he announced that he had hired Barbara Roper, a long-time consumer advocate and frequent critic of Robinhood and the broader brokerage industry, as a senior adviser.
At the crux of the SEC’s inquiry is whether the online brokers are offering investment advice or recommending stocks. That might subject them to strict standards for fiduciaries, requiring them to put their clients’ interests first.
Massachusetts securities regulators filed a complaint against Robinhood last year, alleging that it fell far short of adhering to its fiduciary obligation to customers. Robinhood has aggressively contested the claims, arguing that such a standard of care doesn’t apply because the firm isn’t offering investment advice.
In a statement, Robinhood said that it looked forward to engaging with the SEC on its review. “Increased retail participation in our capital markets is unequivocally a good thing, and we are happy to see the SEC recognize those benefits in its request for information,” the company said.
An outside representative for Webull didn’t immediately respond to requests for comment.
The SEC said it will use the feedback it gets from the public over the next 30 days to assess whether current rules are adequate. Among the issues the agency wants comments on:
- The use of social networking tools to connect investors.
- Games or contests that employ interactive graphics and offer prizes.
- How notifications, by email or texts, are used by brokers.
- Digital celebrations, such as the famed Robinhood confetti — now discontinued by the firm.
- The presentation of investment “ideas” or suggestions to clients, especially when shown at the time they place orders.
- The use of so-called chatbots to respond to customers rather than a live human.