
The U.S. Securities and Exchange Commission has reformed trading platforms such as Robinhood that use predictive analytics to encourage trading, nearly two and a half years after gamification of trading helped fuel the meme stock frenzy.
Brokers' use of predictive analytics technology that helps guide, forecast or direct customers' investment behavior has gone up, the SEC said. While that may encourage investors to trade, brokers get paid when clients trade more. The SEC decided Wednesday that broker-dealers and trading apps should be subject to the same regulatory standard to which investment advice they give to their clients.
Under the Best Interest regulations, brokers are required to disclose any conflicts with their clients, disclose any conflicts of interest, and mitigate those conflicts where possible.
Similarly, the new rules unveiled Wednesday are designed to eliminate possible conflicts of interest between algorithms and investors, and prevent new technologies from undermining companies' legal obligations to clients.
There were two dissenting voices-the Republican Commission's chair, Mark Uyeda and Hester Peirce, who argued that the rules were too broad, encompassing even everyday technological functions, while undermining investors' decision-making capabilities.
The vote is a culmination of a two-year investigation by the SEC, launched in the aftermath of 2021's meme-fueled trading frenzy. Regulators have questioned whether brokerage apps like Robinhood, which engages investors with stimulating features such as push notifications, colorful graphics, and a game-like interface, may encourage excessive trading that harms investors but tends to be profitable for market intermediaries.
The commission also voted on whether it would pass a rule requiring companies to disclose material cybersecurity risks. The resolution also passed a 3-2 vote, with Chairman Gary Gensler tipping the scale in favor of passage.
Gensler, speaking on condition of anonymity, said the rules would benefit investors. He also added that the new guidelines would focus only on those risks that pose a significant threat to a company's operations. Companies would only be required to disclose material risks in an 8-K filing.
The Commission's Chairman, Mr. Peirce and Uyeda, dissented, pointing out that the new rules would unduly burden smaller companies with excessive regulatory requirements.