SEC Seeks Feedback on BD and RIA Digital Engagement Practices | Goodwin


The SEC recently public comments solicited on Digital Engagement Practices (DEP) used by certain brokers and investment advisers, including predictive data analytics, differential marketing, and behavioral prompts (such as gamification). Public comments window ends October 1, 2021. Letters of comment already submitted are available here– they run the gamut and are quite interesting to read.

SEC request comes as part of an in-depth review of these practices and also relies on SEC Chairman Gary Gensler May 2021 remarks to the House of Commons Financial Services Committee, which Gensler reinforced in the testimony before the Senate Banking Committee September 14, 2021. Gensler’s remarks highlighted the increased use of DEPs by companies and, at least as Gensler seems to see, the associated risks to investors. Through the public consultation process, the SEC hopes to gain a better understanding of DEPs in order to facilitate an assessment of their use in light of existing regulations and to further examine the regulatory measures that may be needed to protect investors.

Although the SEC did not define DEPs, it did provide examples: social networking tools; games, sequences and other competitions with prizes; points, badges and rankings; opinion; celebrations for commerce; visual cues; ideas presented during ordering and other curated listings or features; subscriptions and membership levels; and chatbots. The SEC also notes that companies are using artificial intelligence and machine learning to “transform the user interfaces and interactions retail investors have on digital platforms by developing an understanding of investor preferences and tailoring the interface and the associated prompts to invoke these preferences “. The SEC’s request includes a number of specific DEP-related questions in addition to an 11-question retail investor survey.

The SEC notes some benefits that can result from PEDs, such as increased investor engagement. At the heart of the SEC’s claim, however, appears to be the idea that technology enables investor engagement in a way that can cause investors to act in a prejudicial manner and which may conflict with interests. brokers and advisers providing the signals. . For example, the SEC notes that DEPs can encourage frequent trading, using strategies that carry additional risk, and even use what the SEC calls “dark patterns” – interface and design choices that are knowingly designed to confuse users or manipulate preferences or actions. And in his recent remarks to Senate Banking, Gensler suggested that “the models could also inadvertently reflect historical biases embedded in datasets that can be proxies for protected characteristics, like race and gender.” His remarks also juxtaposed benefits such as increased access and choice in markets to “questions about potential conflicts within the brokerage, wealth management and robotics advisory spaces, particularly if and when models brokerage or investment advisor are optimized for revenue and platform data. collection. ”The ever-worrisome concern of ‘systemic risk’ also appears to be in the foreground.

At a minimum, we expect the SEC to double down on Gensler’s recent remarks by issuing staff guidance to the industry. Staff are likely to focus their attention on conflicts of interest, company disclosures to clients (including how they generate income, even in an environment of zero trading fees) and whether company shares reach the level of actionable advice or recommendations. But outright bans on some DEPs seem unlikely, as does the development of formal rules, at least in the near future. Much of the attention to these matters rests on the investor protection component of the SEC’s tripartite mission. But the plaintiff’s bar could be the primary beneficiary of any negative inferences towards DEPs.

[View source.]


About Author

Comments are closed.