SEC Chair Argues for Expanding Scope of Regulation Best Interest in Light of Emerging Technologies

SEC Chair Gary Gensler reviewed the evolution of broker-dealer and investment adviser best interest practices over time, and how those practices should account for issues raised by the new "digital age" of finance.

In an address before the North American Securities Administrators Association, Mr. Gensler said that predictive data analytics and other digital engagement practices ("DEPs") are "evolving the way that brokers and advisers engaged with investors, including through robo-advisers, brokerage apps, and wealth management apps." He emphasized that such practices raise questions of investor protection, including (i) when "behavioral nudges" from DEPs should constitute a recommendation under the securities laws and (ii) what certain DEPs are prioritizing. Mr. Gensler suggested that such practices may require an expansion of the scope of the Regulation Best Interest's application, and that the SEC staff is considering "additional bulletins that would further provide their views" on the application of the Regulation Best Interest and the investment adviser fiduciary standard. Mr. Gensler emphasized that it should not be possible to circumvent the best interest obligation through the use of DEPs, particularly where "behavioral nudges take on attributes similar enough to advice or recommendations such that related investor protections are needed."

Mr. Gensler argued that through behavioral nudging and the use of various DEPs, broker-dealers and investment advisers can narrowly target consumers with specific marketing and pricing, and nudge them towards certain investments. He questioned whether or not such practices still keep the investors' best interests in mind, as institutions could easily nudge investors towards a product that would maximize the institution's profits instead of the investors' profits. Additionally, Mr. Gensler also expressed concern that emerging technologies may inadvertently perpetuate historical biases as institutions increasingly rely on algorithms to make recommendations to investors.

Mr. Gensler raised the issue of investor protection with respect to crypto markets. He concluded by expressing particular concern as to investments in crypto assets, stating that "there's a need to bring greater investor protection to these crypto markets." Mr. Gensler emphasized that "if investors are putting money behind a group of entrepreneurs raising money from the public in anticipation of profits, that's the hallmark of an investment contract or a security under our jurisdiction."