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SEC is digging up information on use of digital engagement practices by broker-dealers

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Joyashree Dey Follow

INDIA

Sep, 04 2021

Sep, 04 2021

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The U.S Securities and Exchange Commission (SEC) announced on August 27 via a press release that it is investigating into online brokerages and investment advisors’ methods of differential marketing, gamification and behavioural prompts to attract customers to trade more stocks and other securities.

The recent decision from Washington regulators is to put a harness on the increasing force that investment advisors are playing in stock markets. SEC has received a tons of request from several U.S. law firms to crack down on brokers that provide millennial and other beginners who embraced trading during the pandemic, following this year’s wild volatility for meme stocks. 

Online brokerages such as Robinhood Markets Inc. and Webull Financial have promptly attracted millions of new investors with innovations like zero-commission trading and game like apps. Trading frenzies in GameStop Corp. and other so-called meme stocks —amplified by online forums such as Wall Street bets—have prompted regulators to take a closer look at industry practices.

In this regard, SEC Chairman GaryGensler commented, “In the last few years, we’ve seen a proliferation of trading apps, wealth-management apps, and robo advisers that use these practices to develop and provide investment advice to retail investors.” He also added “In many cases, these features may encourage investors to trade more often, invest in different products, or change their investment strategy.”

In Friday’ press release, the Wall Street regulator said it’s seeking information from market participants, consumer advocates and others on “digital engagement practices” that are closely linked with the mobile phone apps offered by brokers. The SEC said it’s concerned that such technologies encourage excessive trading and pushing specific stocks by which investors are at great risk.

“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,” Gensler stated.

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. Recently, he announced that he had appointed Barbara Roper as a senior adviser, a long-time consumer advocate, frequent critic of Robinhood and the broader brokerage industry,

At the root 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. 

The public comment period will remain open for 30 days following publication of the SEC’s Request in the Federal Register. The Commission encourages retail investors to comment on their experiences of online brokerages by submitting a Feedback Flyer.


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Joyashree Dey

CBW - External Analyst

INDIA

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