Robinhood says SEC faces high legal burden to change broker-app rules

Robinhood Markets Inc. fired a warning shot to regulators, saying efforts to impose new rules on online brokerages’ engagement with their customers would face a high legal burden and could ultimately be rejected by U.S. courts. 

In a 27-page letter to the Securities and Exchange Commission, Robinhood laid out a number of arguments for why it will be hard to justify enhanced oversight. The SEC is examining whether notifications, lists of popular stocks and a variety of game-like features used by Robinhood and other brokerage apps are encouraging excessive trading that puts retail investors at risk. 

“The bottom line is that additional regulation in this area will undoubtedly raise significant legal issues,” Robinhood Financial President David Dusseault wrote in the letter, which was posted on the SEC’s website Tuesday. 

Robinhood said its mobile app isn’t a game, noting that in contrast to some of its competitors, it doesn’t use tactics such as leader boards or trading competitions to keep users coming back. Moreover, the brokerage argued, attempts to hem in digital engagement with brokerage apps could violate free-speech protections.

In August, the SEC asked the industry to comment on a list of questions about the tactics app-based brokerages use to keep their customers engaged and that have been criticized as “gamification” of investing. Robinhood, with more than 22 million funded accounts at the end of June, is among the largest U.S. brokerages and has been in the spotlight as retail trading took off during the pandemic.

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The brokerage also argued that it doesn’t use technology to push specific investments or tailor trade ideas for particular customers. The firm had previously come under fire for offering lists of the top-traded stocks on its mobile app. Such lists, the company said, are meant to provide users free information.

Robinhood cited the First Amendment in arguing against further rules, saying it protects a brokerage’s ability to inform and communicate with customers through words as well as graphics. 

“Just as a painting or a symphony is entitled to no less First Amendment protection than a novel or a newspaper article, digital platforms do not lose First Amendment protection when they express ideas through ‘animation and graphics’ or ‘visual cues,’” the company said in its letter to the SEC. 

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