Harvey Pitt, former SEC Chairman, joined Yahoo Finance Live to discuss his thoughts on the possible regulation of trading app Robinhood.

Video Transcript

SEANA SMITH: Now, turning back to the markets, one of the stocks that's under quite a bit of pressure recently, and especially today, is GameStop-- shares today falling below $50 a share. So it looks like the short squeeze may have come to an end. Remember that this is a stock that hit a high of $483 just a few weeks ago. We want to bring in Harvey Pitt. He's a former chairman of the SEC.

And, Harvey, it's great to speak with you. Thanks so much for taking the time to join us today. I guess, first, let's just start with the role of government in all this. What role do you see government playing in regulating the type of trading that we've seen over the last couple of weeks?

HARVEY PITT: Well, government has standards for any financial services firm, and that includes firms like Robinhood that are online venues for trading. In addition, the government also regulates the standards for margin requirements and the posting of security, which is part of the regulations that caused Robinhood to stop trading in GameStop stocks when the demand became so great.

ADAM SHAPIRO: When we talk about regulation and looking at everything, I want to bring into the discussion what's going on with SPACs. Is there any concern-- we had $82 billion raised last year because of SPACs-- is there any concern that there may be a need for some oversight in addition to what we already have through the SEC through the government?

HARVEY PITT: I think there are questions about SPACs and their effect on the market. There are also questions about the disclosures that are made and the uses for which the funds raised are put. But in general, raising funds to acquire other companies is itself a very accepted course of conduct. And it's one that's been around for a long time, although not quite in the context we're now seeing it.

SEANA SMITH: Harvey, I guess if we were to see regulation on SPACs, one, what do you think that would look like? And then two, is there any reason to tread carefully when it comes to this? Because there is a thought out there that if there is too much regulation put in place, it could potentially obviously trigger a sell-off in the markets.

HARVEY PITT: Part of the difficulty is what the government can actually regulate. If there are legitimate postings on social media that express views about securities, and they're not manipulative, and they haven't been done with any malevolent motivation, there's very little the government can do about that. So that's sort of one set of factors that is going to hamstring those who are asking for extensive regulation here.

The best course of action is the one that the SEC is currently taking. It has announced that it is doing a thorough review of everything that took place that led to the run-up of GameStop securities and how the Reddit forum worked-- who made the postings and what their potential motivations were. As soon as that information is available, I think there are real things that the government can do. It doesn't have to tolerate excessive exuberance or false statements, but it has to be careful not to interfere with the free flow of the marketplace.

ADAM SHAPIRO: How do you determine that balance? I mean, we had a guest on who was a convicted felon-- it was Jordan Belfort-- talking about pump and dumps. And there were some people who were saying what we witnessed in the Reddit forum was a kind of high tech version of what could have been a pump and dump. How do you figure that out?

HARVEY PITT: You have to go in and get the emails, get the identities of the people who are actually posting these comments on Reddit. And you may have to go further and look at their own trading activities individually as well as looking at the scope of trading in general. But the people who are posting these statements can be determined, they must be determined. And the nature of their motivations can be determined by questioning and answering under oath, which the SEC is empowered to do.

SEANA SMITH: Well, Harvey, is it tougher for the SEC to address a case like this? Because, obviously, it involves social media, it involves message boards, like you were just talking about, it involves tweets in some cases. I mean, to what extent does that maybe complicate the SEC's case and their ability to prove this?

HARVEY PITT: It complicates it enormously. And that's an excellent question. There are competing interests here. People who go on social media to purvey false information engage in some type of fraudulent behavior. And that can occur in the securities markets as well as any other markets.

But people who express their legitimate opinions about things are utilizing their First Amendment right to free speech. And that is very difficult, if not impossible, to cap in any sensible way, except looking at comments after the fact. And that is exactly why the SEC's approach of doing a thorough investigation now is the key to being able to make the kinds of determinations that will have to be made.

SEANA SMITH: Harvey Pitt, former chairman of the SEC, we really appreciate you taking the time and hope you come back here on "Yahoo Finance Live" again soon. Thanks so much for talking to us.