By: Aya Abdellatif
The investment world has seen unprecedented popularity lately with Robinhood and other apps aimed at new investors.[1] These apps often have bright colored screens, calculate the odds and potentials for certain investment outcomes, and can send congratulatory messages along with features such as confetti, when a user places a trade.[2] All of these features are a part of what the SEC deems the potential “gamification” of investment apps. Recently, the SEC has expressed concern that these apps may lead to conflicts amongst investors and change their investment goals.[3] Gambling hotlines have seen a sharp uptick in calls related to day-trading, and one gambling hotline based out of New Jersey claimed a nearly 50% uptick in calls related to day-trading to their hotline alone.[4] Many have connected this uptick in calls to the gamification of investment apps.[5]
In August, the SEC Chair stated that these digital engagement practices or “gamification” “potentially harm retail investors if they prompt them to engage in trading activities that may not be consistent with their investment goals or risk tolerance.”[6] The SEC and others believe that features such as the optimal outcome features and the impact of the trades placed determined by the apps may constitute investment advice.[7] Another current concern related to these apps according to the SEC is that it may harm investors by “[f]ollowing the wrong prompt on a trading app, though, could have a substantial effect on a saver’s financial position.”[8] This would fall under the Regulation Best Interest and therefore, may be a potential violation of U.S. securities laws. Regulation Best Interest states that broker dealers are only allowed to “recommend financial products that are in their customers’ best interests, and they must clearly identify any potential conflicts of interest behind any recommendations.”[9]
However, critics are not giving in to this narrative. Senator Pat Toomey, one of the critics of this potential categorization, argues against regulation of these features of the apps stating that they should not be seen as games, simply “because they make investing ‘easy and enjoyable.’”[10] Similarly, the Associate Counsel of the Securities Industry and Financial Markets Association (SIFMA) argued that there are benefits to digital-engagement practices. “DEPs can ‘provide significant benefits to retail investors, including enhanced access to customized products and services, lower costs, access to a broader range of products, better customer service, and improved compliance efforts leading to safer markets.’”[11]
The potential regulation of these digital engagement practices would be significant. It may completely affect the way apps like Robinhood, Stash, and others differentiate themselves from current traditional apps. If the SEC deems that these trading prompts and optimal outcome features along with the game-like features are indeed a violation of U.S. securities laws and create regulation around these features, this may severely harm apps like Robinhood and Stash, which rely on these features to encourage and engage with newer investors.[12] It may also hinder the outreach of traditional brokerage firms and their ability to expand their customer base to younger and newer investors.[13]
Overall, the comment period and response from the SEC will be incredibly important to everyone in the industry, from traditional brokerage firms to “new-age” brokerage firms like Robinhood, to average everyday investors because it may decide the future of the investment world. If the SEC is successful in regulating digital engagement practices and putting a halt on the gamification of investment apps, it may uproot the investment world as we know it.[14]
[1] See Richard Falvo, Robhinhood: Beyond the Popularity, The Colgate-Maroon News (Oct. 31, 2020) https://thecolgatemaroonnews.com/25657/commentary/robinhood-beyond-the-popularity/.
[2] See Thomas Franck & Maggie Fitzgerald, SEC Steps up Research into Brokers’ ‘Gamification’ of Trades, Chair Gary Gensler says, CNBC (Aug. 21, 2021, 3:13 PM) https://www.cnbc.com/2021/08/27/sec-steps-up-research-into-gamification-of-trading-with-online-brokers-gary-gensler-says.html.
[3] See SECUTIRIES AND EXCHANGE COMM’N, SEC Requests Information and Comment on Broker-Dealer and Investment Adviser Digital Engagement Practices, Related Tools and Methods, and Regulatory Considerations and Potential Approaches; Information and Comments
on Investment Adviser Use of Technology, (Aug. 27, 2021), https://www.sec.gov/news/press-release/2021-167.
[4] See Ethan Wu, Gambling Helplines See Nearly 50% Surge in Day Trading-Related Calls as SEC Probes ‘Gamification’ of Retail Brokerages, Business Insider, (Oct. 6, 2021, 12:58 PM), https://markets.businessinsider.com/news/stocks/gambling-day-trading-robinhood-retail-investors-tenev-sec-gamification-brokers-2021-10
[5] Id.
[6] Franck & Fitzgerald, supra note 2
[7] Id.
[8] See Al Barbarino, Toomey, SIFMA Say No to New SEC ‘Gamification’ Regs, Law360, (Oct. 1, 2021, 7:14 PM), https://www.law360.com/articles/1427346/toomey-sifma-say-no-to-new-sec-gamification-regs.
[9] Id.
[10] Id.
[11] Id.
[12] See Robert Schmidt & Ben Bain, Gensler’s Terrible 10: SEC Rules That Make Wall Street Tremble, Thinkadvisor (Oct. 11, 2021, 12:15PM) https://www.thinkadvisor.com/2021/10/11/genslers-terrible-10-sec-rules-that-make-wall-street-tremble/
[13] See Erik Gordon, Why Gamified Trading is Good for the Stock Market, Fortune (July 28, 2021, 7:00PM) https://fortune.com/2021/07/28/robinhood-ipo-meme-stocks-gamification/
[14] See Annie Massa & Akayla Gardner, Robinhood Wannabes Dare Regulators With Embrace of Games and Prizes, Bloomberg (Oct. 15, 2021 2:03PM) https://www.bloomberg.com/news/articles/2021-10-15/robinhood-wannabes-dare-regulators-with-embrace-of-games-prizes
