Former chairman of the Commodity Futures Trading Commission, Gary Gensler, testified at a hearing of the U.S. Senate Banking Committee on systemic risk and market oversight at Capitol Hill in Washington on May 22. 2012.
Jonathan Ernst | Reuters
The Securities and Exchange Commission said Friday that it is stepping up its investigation into gamification calls and indications of behavior used by online brokers and investment advisers to encourage people to trade more stocks and other securities.
The top Wall Street regulator said investors may be fooled by rosy profit projections derived from technologies that actually underestimate the risk of a particular investment or the odds of spectacular returns.
“While new technologies can give us greater access and better product selection, they also raise questions about whether investors are adequately protected when we operate and get financial advice,” SEC President Gary Gensler said in a statement. “In many cases, these features can encourage investors to trade more often, invest in different products, or change their investment strategy.”
The SEC is seeking public comment before drafting new rules and regulations on Wall Street, meaning Friday’s announcement, while procedural, can be a headache for industry leaders.
Shares of Robinhood Markets, operator of a popular digital trading platform that has been scrutinized for its customer trading requests, fell as much as 1% to the day’s lows after the SEC report.
The commission said companies and online investment brokers will often use “predictive” analysis tools designed to show clients what they would earn with optimal (but not necessarily likely) results.
While brokers may reveal that their predictive models are not guarantees of future returns, Gensler said he wants to gather investors’ thoughts on game-like features on financial platforms, indications of behavior to operate more frequently, and “other digital elements or functions designed to interact with retail investors on digital platforms “.
As part of the announcement, the SEC said it will collect public contributions for 30 days after application and comment forms are available online.
Gensler said he is especially interested in hearing from the public about two key questions.
First, the SEC president wants to know how the financial regulator should protect investors from a potential conflict of interest.
Online brokerages generate profits when their customers operate more frequently. Robinhood Markets, for example, makes money in part by sending orders from its customers to high-frequency merchants in exchange for cash. This process is controversial and known on Wall Street as payment for order flow.
But if gambling requests or congratulatory messages from online brokers cause customers to make more trades, and especially if more trades result in lower portfolio performance at slightly worse prices, should the SEC intervene?
Gensler’s second key question is a little more cerebral.
In essence, the SEC wants to respond: if gambling or brokerage prediction requests assume optimal results and affect how often customers trade, the regulator should consider those requests from the application as to formal investment recommendations or investment advice?
The SEC is seeking public comment before drafting new rules and regulations on Wall Street, meaning Friday’s announcement, while procedural, can be a headache for industry leaders.
Despite the exceptional growth of the millennial-favored stock trading app, Robinhood has faced regulatory issues in terms of its digital engagement with its millions of customers.
The financial industry’s regulatory authority in June slapped Robinhood with the largest penalty in history, totaling about $ 70 million. FINRA said its penalty came in response to Robinhood’s technical failures in March during an eruption of trading mania, its lack of diligence before approving clients to make options trades and transmit misleading information. to customers on aspects such as margin trading.
CEO Vlad Tenev testified before the U.S. House Financial Services Committee in February about GameStop’s bargaining craze in early 2021.
Robinhood has also paid the SEC $ 65 million after it was accused of misleading customers about how the app makes money and failing to deliver the best promised execution of transactions.
In response to the public reaction, Robinhood has since taken steps to address some of the scrutiny, such as providing more educational services to its customers and eliminating the confetti function when investors conduct transactions.
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