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Sources tell Charlie Gasparino of FOX Business that Gensler is concerned that easy-to-use trading platforms encourage buying of risky stocks.
The Securities and Exchange Commission is considering a major crackdown on so-called meme stock investing that could impose additional regulatory burdens on the low- and no-fee brokerages that have been at the heart of handling the trading of AMC Entertainment, GameStop and other risky stocks, FOX Business has learned.
Securities and Exchange Commission officials have discussed whether they could impose a regulation on brokerages, such as Robinhood, that could force companies to warn investors about the risks of buying these risky stocks before closing a deal, according to people with direct knowledge of the matter.
Ticker Security Last Change Change% AMC AMC ENTERTAINMENT HOLDINGS INC 55.00 +7.09 + 14.80% GME GAMESTOP 280.01 +31.65 + 12.74%
Shares of these companies have exploded in recent days, buoyed by strong buying from daily retail traders who trade stocks on tips from message boards like Reddit’s “WallStreetBets” and through easy-to-use trading apps like those offered by Robinhood. It is also heavily exposed to short selling by hedge funds that believe the shares are overvalued given their business prospects.
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But the head of the Securities and Exchange Commission, Gary Gensler, worries that these stocks are easy to trade on Robinhood and elsewhere — and that investors could set themselves up for heavy losses.
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It has been suggested that one way to deal with the “incentive” to trading exemplified by the wild races in stocks like AMC and GameStop is to force these brokers to act like proxies rather than passive trading platforms that only process trades, people say.
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(Reuters/ Jose Luis Magana)
By enforcing the regulation, known as “Regulation in the Best Interest” (Reg BI), Robinhood will have to “step in” and warn investors about the risks of trading some of these stocks, a person familiar with Gensler’s thinking said. The Securities and Exchange Commission (SEC) has begun examining the runaway trading of namesake memes that only traded last year as a penny stock.
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An SEC spokesperson did not respond to multiple requests for comment.
Applying the rule will provide another regulatory burden for investing apps like Robinhood and its business model that aims to make investing fun and almost easy for beginners. As reported, Robinhood is looking at an IPO in the coming weeks and its user growth has exploded over the past year, all backed by the purchase of meme shares on its platform.
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But Gensler tells people that the ease of Robinhood and the motivational aspects of its business model (the company has since ended flooding user apps with digital snippets after trading) can be interpreted by securities regulators as offering the company “advice” because those features can encourage investors to buy stock. dangerous.
As a result, Robinhood can be considered a fiduciary, which will allow regulators to impose additional regulatory burdens on it and other discount brokers such as e-commerce, Ameritrade and Charles Schwab, these people add.
Robinhood did not respond to a request for comment.
Regulation BI was established by the SEC in 2019; It’s basically a ‘know your customer’ regulation that forces brokers to recommend only financial products to clients that serve their best interest. Low-fee and no-fee brokers such as E-Trade, Ameritrade and Robinhood have been exempted from these rules as they involve self-directed trading rather than trades based on the recommendation of a financial advisor.
While legal experts say regulators could broaden the definition of what constitutes advice, the move could face serious legal challenges. The Securities and Exchange Commission can direct the Financial Industry Regulatory Authority (FINRA), the regulator that provides front-line regulations for brokers, to enforce the broader interpretation of BI regulation.
“If this happened, it would most likely be done through the FINRA rule, rather than the SEC rule. FINRA could regulate best practices for the broker,” said John Coffey, professor of securities law at Columbia University. “It can be justified in part by the best interest in regulation, but this rule only applies if a recommendation is made. In many cases, this is debatable.”
It’s unclear how serious Gensler is about extending Regulation BI’s reach, but people with knowledge of his thinking say he believes trading manipulation is the root cause of meme stock’s massive rise beyond rational financial justification. He worries that stocks will eventually collapse, causing serious harm to small investors.
The finances of companies like AMC and GME remain in doubt even as their shares gain new life among many first-time retailers. These novice investors flocked to trading during the pandemic lockdowns as a hobby using the no-fee Robinhood app and other low-cost trading platforms.
M stocks have been moving significantly from their highs earlier in the year and have seen a rebound in recent weeks. AMC and GameStop prices are up nearly 2,000% and 1,500%, respectively, since the beginning of the year.
In less than a month, AMC’s shares are up 450%, taking the money-losing theater chain’s market value to nearly $30 billion before Monday’s close. Stock actions recently forced the company to issue an unusual warning to investors that its shares may be overvalued and may soon be crushed.
The SEC said in a statement on Monday that it “continues to monitor the stock frenzy” in light of the ongoing volatility in certain stocks to determine if there has been any market disruption, manipulative trading, or other misconduct.”
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