On August 27, 2021, the SEC issued a press release “requesting information and public comment on matters related to the use of digital engagement practices by broker-dealers and investment advisers.”
The primary goal of the Request for Comment was to aid the Commission in determining whether or not regulatory action will be needed to protect retail investors against potential unfair practices when using digital tools.
These digital tools include:
- behavioral prompts
- differential marketing
- game-like features (a.k.a. gamification)
- digital elements or features designed to engage with retail investors
- analytical tools and methods known as DEPs (digital engagement practices)
These types of tools cover a wide net, including AI, analytics, big data, subscriptions, point systems, notifications, and beyond.
The Commission seeks to improve its understanding of new, modern Fintech tools and welcomed feedback from investors and other market participants. Through this feedback, they hoped to learn both the benefits and possible conflicts of interest that arise in the use of these tools.
The SEC recognizes that, although certain tools help investors, certain platforms may be focused on digital engagement to the point that its users are exploited. In the press release, SEC Chair Gary Gensler stated, “Predictive analytics and other DEPs often are designed with an optimization function to increase revenues, data collection, or customer time spent on the platform. This may lead to conflicts between the platform and investors.” Gensler also explained how certain features encourage investors to trade more often, select different products, or alter their investing strategies.
In the article, “SEC Scrutinizes Use of Fintech by Broker-Dealers and Investment Advisers,” national law firm BakerHostetler stated, “…the release notes that, while certain digital engagement practices…may help democratize retail investing, they may also lead to investment activity that is inconsistent with a retail customer’s goals or risk tolerance…”
The Commission will use the information from the request to assess whether or not existing regulations are sufficient, or if additional regulatory action is needed. While this does not directly tie to the practices of most financial advisors, this move indicates that regulators like the SEC want to ensure that, as technology adoption increases, proper control, risk, and compliance measures are in place.
It will be interesting to see what ruling comes out of this assessment. Further regulatory action could have far-reaching effects. Certain systems and processes that were put into place to optimize revenue and engagement may need to be amended or abolished altogether, leaving some Fintech platforms scrambling to adapt.
The SEC did, however, welcome explanations regarding the benefits of these features and requested such information in its request. Its Request for Comment ended October 1, 2021.
At TIFIN Wealth, we strive to provide coverage for advisory firms to ensure they are properly evaluating and educating clients before placing them into investment strategies. This is why fact-based Risk Capacity is at the core of the TIFIN Wealth Risk Alignment questionnaire.
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