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SEC rules need revisiting in light of gamification concerns, Gensler says


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SEC rules need revisiting in light of gamification concerns, Gensler says

Wall Street's top regulator needs to make sure its rules are suited for the current era of app-based financial trading, according to its head official.

Newly minted Securities and Exchange Commission Chair Gary Gensler plans to tell lawmakers May 6 that the financial watchdog may need to "freshen up" its rules so that investors trading through brokerage apps on their phones are protected in the face of behavioral prompts and "game-like features" that may be incentivizing them to trade more often.

"If we watch a movie that a streaming app recommends and don't like, we might lose a couple of hours of our evening. If a fitness app nudges us to exercise, that's probably a good thing," Gensler wrote in prepared testimony for a House Financial Services Committee hearing. "Following the wrong prompt on a trading app, however, could have a substantial effect on a saver's financial position. A big loss could have immediate implications for the app user's ability to afford their rent or pay other important bills. A small loss now could compound into a significant loss at retirement."

Over the last year, mom-and-pop investors have piled into financial markets, buying up everything from meme stocks to complex option contracts to Dogecoin, as a mix of pandemic boredom, zero-commission trading and rising asset prices set in. The influx of retail money into the markets has given way to mounting concern among investor advocates, regulators and lawmakers about what has come to be known as the gamification of trading. And though there is no clear consensus on what gamification looks like in financial markets, a point Gensler makes in his testimony, it is an idea that has taken center stage in the wake of the GameStop Corp. episode.

Brokerages, particularly those run by financial technology companies looking to attract younger customers, have been deploying a mix of features over the years to make trading more appealing. When a customer signs up to open a brokerage account with Social Finance Inc., for example, they are offered the chance to play a digital version of a claw-machine game where their prize could include $5 worth of stock.

Robinhood Markets Inc., the Menlo Park, Calif.-based brokerage, has become the face of gamification concerns due to its popular app's design, which until recently splashed confetti across customers' phone screens when they made their first trades. Massachusetts officials are currently pushing to revoke the brokerage's license to operate in the state over claims that Robinhood has "continued a pattern of aggressively inducing and enticing trading among its customers — including Massachusetts customers with little or no investment experience."

At a March confirmation hearing held by the Senate Banking Committee, Gensler, a longtime executive at The Goldman Sachs Group Inc. who previously led the Commodity Futures Trading Commission, laid the groundwork for the SEC's foray into the gamification questions, saying that it was an area the regulator needs to study.

Gensler has already asked the SEC staff to prepare a request for input from the public around the issue, he wrote in his testimony.

"We need to ensure investors using apps with these types of features continue to be appropriately protected and consider how all of our rules apply in these situations, including Regulation Best Interest," Gensler plans to say. "If we don't address this now, the investing public — those saving for their futures, retirements, and education — may shoulder a burden later."