Nudges from trading apps that encourage investors to buy stocks could amount to investment advice and subject the online platforms to the Securities and Exchange Commission’s broker advice standard, regulators said Sunday.
SEC Commissioner Allison Herren Lee said Regulation Best Interest is triggered when an investment recommendation is made, a determination that's based on facts and circumstances. One of the factors is whether a communication with an investor could reasonably be viewed as a call to action to trade in a particular security.
“The more individually tailored a communication is to a customer, I think, the more likely it may be to be viewed as a recommendation,” Lee said during a panel at the North American Securities Administrators Association fall meeting in Chicago.
Last month the SEC released a request for comment regarding “digital engagement practices” used by investment advisers and broker-dealers. The agency said it is looking into ways that advisers use tools that appeal to investors’ behavioral tendencies — such as game-like features known as gamification — to shape their activities on websites, portals and mobile apps.
Exploring whether digital apps encourage trading in riskier products, such as options, or trading that’s aligned with brokers’ rather than customers’ best interests and delving into compensation structures and conflicts of interest are areas the SEC should address, Lee said.
“I really look forward to hearing from retail investors and other market participants on this because it’s a really important area for us to focus on,” said Lee, who participated in the conference virtually via a video connection.
The question of whether Reg BI applies to a trading app is crucial not only to determining the reach and strength of the rule but also could have a profound affect on platforms like the popular one offered by Robinhood. The online brokerage, which is being sued by Massachusetts for violating the state’s fiduciary duty rule, maintains that it does not provide investment advice.
Maryland Securities Commissioner Melanie Senter Lubin said that when online brokers encourage customers to trade, they could be exceeding the bounds of the brokerage model.
“I’ve always wondered when do those nudges really take somebody beyond being a broker-dealer into being an investment adviser because they’re giving specific advice about a specific security, and isn’t that one of the provisions that puts you firmly in the investment adviser space [and] ups their obligation,” said Lubin, who is NASAA president-elect and spoke from the Chicago site of the state regulators’ conference.
The Financial Industry Regulatory Authority Inc. also is reviewing trading platforms and brokerages’ use of social media. It recently launched exam sweeps on how firms handle options accounts and how they use paid social media influencers — so-called “finfluencers’ — to attract new customers. It also is conducting a sweep on zero-fee trading.
“I think there is room for improving some of the rule set that we have in this space — for example, complex products, options,” Finra CEO Robert W. Cook said during the NASAA panel on Sunday, which he attended in person. “Are there appropriate disclosures — up to date — for the world we live in for investors? That’s one area I’ve asked our team to take a closer look at.”
The panel of regulators also discussed a push by the brokerage industry to extend remote inspections of branch offices, one of the policy changes implemented during the coronavirus pandemic. Last week, Finra moved to continue the relief from on-site exams through next June.
Lee said the SEC has been hearing from registered reps and brokerages about a permanent policy change on in-person inspections.
“That’s something we’re looking at and thinking through,” she said. “To me, it seems certain that change is here, and we need to make sure we approach it wisely.”
Finra members have asked the regulator to reconsider the definition of a branch office and an office of supervisory jurisdiction after brokerages conducted their operations remotely during the pandemic.
“This is an area where a lot more thought is necessary,” Cook said. “It’s important that our rule book evolve, but those are pretty big lifts — to redefine what is an OSJ and what is a branch.”
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