The U.S. Securities and Exchange Commission (SEC) has made moves to impose stricter controls on retail brokerages such as Robinhood Markets Inc., in an effort to safeguard customers from the dangers posed by the application of advanced analytics.
The regulators are concerned these firms could exploit the tech to unduly prompt customers to trade, a situation prompted by the meme-stock frenzy of 2021, the Wall Street Journal reports.
The SEC’s intent is to hold algorithms predicting or influencing investors’ behavior to the same standards as investment advice in certain scenarios. This would mandate brokers and advisers to employ such methods to reconcile the conflicts of interest they foster.
SEC Rule Proposal: A Broader Scope
Suggested as a countermeasure to Wall Street’s “digital engagement tactics,” the regulation is a product of a comprehensive two-year study conducted by the SEC, spurred by the extreme trading activity involving GameStop and other meme stocks in the early months of 2021, according to WSJ.
The event triggered congressional inquiries, a 45-page report by SEC staff, and numerous suggestions for modifications in the underlying processes of stock trading.
Regulatory authorities are concerned that brokerage apps, through the use of push notifications, appealing visuals and game-like elements could tempt users to engage in excessive trading that may not align with their best interests. While such practices could generate profits for market intermediaries, they often result in adverse outcomes for individual investors.
These new restrictions are meant to ensure that brokers prioritize their clients’ financial interests over their own when making investment recommendations.
In response, Robinhood has stated it does not view its practice as a recommendation, but rather a presentation of intricate information in ways customers find useful, while making the interface understandable and convenient.
The suggested regulation would broaden the SEC’s supervisory role beyond explicit advice, encompassing any analytical instruments employed by investment companies to forecast or steer investor actions.
Recently, Robinhood has begun offering traditional and Roth individual retirement accounts (IRAs), aiming to diversify its user base and potentially improve its brand image.
The Cybersecurity Rule
In another move, the SEC has voted to implement a rule mandating public companies to disclose significant cybersecurity breaches to their investors within four business days of identification, subject to exceptions for national security or public safety reasons.