Robinhood to SEC: Gamification? It’s free speech!

"Robinhood seems intent on throwing as many possible arguments as possible," law professor Stephen Diamond said.

A photo-illustration of Robinhood CEO Vlad Tenev with red tape over his mouth.

Robinhood CEO Vlad Tenev's company says the First Amendment limits the SEC's ability to regulate the way it engages with users.

Photoillustration: Getty Images; Protocol

Accused of turning stock investing into a dangerous game, Robinhood is fighting back by invoking a basic constitutional right: free speech.

Robinhood cited the First Amendment to defend the way the online brokerage communicates and engages with its users as a response earlier this month to an inquiry from the SEC into the way brokerages engage with customers. "The First Amendment strictly limits the SEC's ability to regulate digital engagement practices based on their communicative content," David Dusseault, chief operating officer and president of Robinhood Financial said in an Oct. 1 letter to the SEC provided to Protocol.

The letter underlines what appears to be a key component of Robinhood's legal game plan, which echoes past debates over SEC rules on what public companies and investors are allowed to tell customers and the public. But some analysts argue that Robinhood's use of the First Amendment is flawed -- and even a bit of a head-scratcher.

"This is a stretch in their comment letter," Bruce Weber, dean of the Lerner College of Business and Economics at the University of Delaware, told Protocol, pointing to the statement arguing that the First Amendment limits the SEC's ability to regulate digital engagement practices.

Robinhood's letter was in response to the SEC's call for "information and comment" on the "digital engagement practices" of stock brokers and dealers, including "behavioral prompts, differential marketing, [and] game-like features," which the agency noted was "commonly referred to as gamification."

SEC Chair Gary Gensler said the agency plans to focus on features that "may encourage investors to trade more often, invest in different products, or change their investment strategy" and the use of tools meant to "increase revenues, data collection, or customer time spent on the platform."

The SEC request did not mention Robinhood specifically. But the company has long been portrayed as the poster child for gamification.

Last year, the company was sued by the Commonwealth of Massachusetts, which accused Robinhood of unlawfulness due to its "aggressive tactics to attract inexperienced investors, its use of gamification strategies to manipulate customers, and its failure to prevent frequent outages and disruptions on its trading platform." These charges became magnified in January during the GameStop trading frenzy, which led to congressional hearings into Robinhood's business model.

Robinhood denied those claims, and argued in its letter to the SEC that platform features "are designed to promote financial literacy and investment awareness and to provide customers with information they need and want in order to make informed and self-directed decisions about their future investment goals and needs."

"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,'" Dusseault wrote.

These features, he argued, are "ubiquitous on today's e-commerce and other digital platforms" and they are based on Robinhood's mission to make stock market investing "not an activity reserved for the wealthy, but one that should be broadly accessible to the masses."

University of Chicago law professor Todd Henderson said that critics like the SEC essentially believe that the "digital engagement" tools used by companies like Robinhood "lead to bad choices by individual investors."

Robinhood's free speech counterargument also comes across as misleading, said Santa Clara University law professor Stephen Diamond, who argued that the company is "attempting to recharacterize the SEC inquiry as an intrusion on speech."

"The SEC release refers to 'practices,' which is not, of course, speech but, well, a practice," he told Protocol. "It seems clear the SEC is understandably concerned about a set of new practices that are luring thousands of often inexperienced and young investors into the securities markets. That's clearly in the strike zone."

Weber of the University of Delaware said the SEC request is "reasonable" and "not broad," and "seems appropriate in the context of investment advice."

Robinhood declined further comment. The company's 37-page response was striking, and appeared to underscore how the company sees the SEC probe as a serious threat to its business, analysts said.

"The length of their letter is unusual," Diamond told Protocol. "They also seem to be getting way ahead of the process. It is not clear how the SEC intends to regulate, if they do regulate. But Robinhood seems intent on throwing as many possible arguments at this effort as possible, perhaps in the hope — likely in vain — that this will discourage the SEC."

Henderson echoed that view, noting that the SEC "just sent this open inquiry and hasn't even issued a rule yet." It's also typically considered a bad idea for regulated companies to take on what appears to be a combative posture toward the SEC, according to analysts.

But Robinhood's letter also suggests that the SEC probe has spooked the company.

"These issues of digital engagement are absolutely essential to their business," Henderson said. "It could be existential for them. That means you're more likely to see them be aggressive, whether that means aggressive court challenge or just aggressively fighting the rules."

Robinhood also needs to worry about possible SEC action on a major revenue stream: rebates earned for sending trade orders to market makers, also known as payment for order flow. Gensler has strongly suggested the SEC could ban it.

"They are likely fighting on both fronts," Diamond said. "Perhaps they have a profitable business without payment for order flow, but if they have to give up digital engagement practices, then they don't look any different than TD Ameritrade or any other broker with a website."


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