Protecting retail investors should be top of the regulatory action list this year: Columbia Law professor
The GameStop Corp. trading frenzy has prompted U.S. regulators to consider new rules for everything from short-selling to investing with options and gamification, indicating watchdogs are just getting started in responding to the market mayhem.
In a letter to Senator Elizabeth Warren, acting Securities and Exchange Commission leader Allison Herren Lee ticked off several rule changes that the regulator should “seriously consider.” They include toughening requirements for brokers that offer options trading, new demands for brokers that sell their customers’ stock orders to other firms and stepped up disclosure standards for hedge funds and other traders who bet against shares.
Meanwhile, the Financial Industry Regulatory Authority, which oversees brokerages, said it’s reviewing whether its rules adequately address the potential risks posed by smartphone trading apps that can urge investors to keep trading with technological prompts and nudges. Warren, a Massachusetts Democrat, released the responses from Lee and Finra Chief Executive Officer Robert Cook Tuesday.
The astronomical rise of GameStop and other stocks -- fueled by bullish posts on social media -- has captured the attention of Capitol Hill. The Senate Banking Committee is holding a hearing Tuesday featuring academics and market experts following an earlier one held by the House Financial Services Committee last month that featured some of the central players in the drama, including Robinhood Markets CEO Vlad Tenev and Citadel founder Ken Griffin.
The GameStop rally is re-emerging with the video-game retailer climbing as high as US$244 in Tuesday trading. The stock has risen about 70 per cent this week.
Warren had asked the leaders of the SEC and Finra about their plans for responding to GameStop, including potential regulator investigations. Some of the highlights from their responses include:
- The SEC is studying stock prices that deviate from their fundamentals. GameStop has highlighted that concern, as it surged despite not expecting to post a profit for years.
- Lee says that the agency is looking at whether there are holes in the SEC’s market manipulation rules.
- Both the SEC and Finra have said their agencies are probing for any wrongdoing, but they’ve declined to disclose specific details.
- Finra noted that gamification may “result in increased risks to customers if not designed with appropriate compliance considerations in mind, raising important regulatory questions.”
- Finra said that Robinhood has some features that “could be viewed as having game-like features.”
- Finra added that there is a question about whether nudges and prompts used by apps are tantamount to stock recommendations, which would subject brokers to tighter rules that require them to act in their customers’ best interests. The regulator also asked whether rules should be revised to make clear that such app compenents do constitute recommendations that investors buy specific stocks.
- Neither regulator provided a timeline for any changes.