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SEC Says It’s Probing Market Mania for Potential Misconduct

The regulator “will closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities.”

(Bloomberg) -- The U.S. Securities and Exchange Commission, facing intense pressure to respond to the recent mania in the stock market, said it’s seeking to identify potential misconduct and will scrutinize brokerages’ decisions to halt buying that triggered a retail-investor revolt.

“The commission is working closely with our regulatory partners, both across the government and at Finra and other self-regulatory organizations, including the stock exchanges, to ensure that regulated entities uphold their obligations to protect investors and to identify and pursue potential wrongdoing,” Allison Lee, the agency’s acting chair, and its commissioners said in a Friday statement.

In its statement, the SEC leadership added that the regulator “will closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities.”

The remarks were the most aggressive yet from Wall Street’s top regulator following a week-long frenzy that has seen small-time investors harness social media to drive up GameStop Corp., AMC Entertainment Holdings Inc. and other stocks, hedge funds get crushed by their short bets and Robinhood Markets and other brokerages restrict trading in the inflated securities.

The tumult has shaken the finance industry and prompted demands from both Capitol Hill Democrats and Republicans for the SEC to take action. The outrage reached a fever pitch Thursday, with lawmakers expressing indignation that investors were prevented from adding to their bullish GameStop positions. Many said they suspected the move was done to help hedge funds, a claim that brokerages rejected.

Robinhood has been at the center of much of the tumult, as it’s been the preferred platform to trade for the army of investors who’ve banded together on Reddit message boards to hype up GameStop and AMC. Robinhood temporarily restricted the buying of those shares Thursday, infuriating many of its customers. It also sought more than $1 billion in additional cash after the stock market’s main clearing hub demanded large sums of collateral from brokerages.

The highly-complex nature of the stock market and the lengthy process for writing new rules means any SEC regulatory changes are likely a ways off. Still, the agency has significant power to influence market behavior by opening investigations, fining or banning those accused of wrongdoing and using the bully pulpit to issue warnings -- as it did Friday.

In pursuing possible manipulation of stock prices, the SEC said it’s focus would be on protecting “retail investors.” It cautioned that market participants “should be careful to avoid” illicit schemes.

Some of the most common are “pump-and-dumps,” in which traders entice others to buy and then dump their shares at the inflated price. Still, such cases can be hard for the SEC to prove because they typically hinge on the agency showing that investors knowingly spread false information to dupe others into purchasing or selling a stock.

TAGS: Equities
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