The Securities and Exchange Commission has issued a request for information (RFI) on the use of digital engagement practices (DEPs) by broker-dealers and investment advisers with an eye toward future rulemaking.
According to an Aug. 27 announcement, the Commission issued the RFI in part to develop a better understanding of the market practices associated with firms’ use of DEPs and their corresponding analytical and technological tools. Notably, the Commission also is hoping to learn what conflicts of interest may arise from optimization practices and whether those optimization practices affect the determination of whether DEPs are making a recommendation or providing investment advice.
The SEC notes that broker-dealers and investment advisers employ a variety of DEPs when interacting with retail investors through digital platforms (e.g., websites, portals, and applications). The associated tools include behavioral prompts, differential marketing, gamification features and other design elements.
While many of these features encourage users to engage more with a digital platform, investment advisers also use these tools to learn more about their clients, and to develop and provide investment advice based on that information, including through online platforms or as part of more traditional investment advisory services, the announcement explains.
In issuing the RFI, the Commission says that it will be assessing:
- existing oversight of this technology;
- how investment advisers and clients have been affected by the technology;
- potential risks to investment advisers, clients and the markets more generally related to this technology; and
- whether regulatory action may be needed to enhance investor protection while preserving the ability of investors to benefit from investment advisers’ use of such technology.
“While new technologies can bring us greater access and product choice, they also raise questions as to whether we as investors are appropriately protected when we trade and get financial advice,” SEC Chairman Gary Gensler said in a statement. “In many cases, these features may encourage investors to trade more often, invest in different products, or change their investment strategy.”
Gensler contends that predictive analytics and other DEPs often are designed with an optimization function to increase revenues, data collection or customer time spent on the platform, which he notes may lead to conflicts between the platform and investors. “I’m interested in the varied questions included in the Request for Comment, and I’m particularly focused on how we protect investors engaging with technologies that use DEPs,” the chairman stated.
The SEC’s request also notes that it is intended to provide a forum for market participants, including investors, and other interested parties to share their perspectives on the use of DEPs and the related tools and methods. This includes potential benefits that DEPs provide to retail investors, as well as potential investor protection concerns.
The public comment period will remain open for 30 days following publication of the RFI in the Federal Register. The Commission encourages retail investors to comment on their experiences by submitting an online survey, available here.
