August 27, 2021

SEC Seeks Comment on Broker-Dealer and Investment Adviser "Digital Engagement Practices"

The SEC issued a request for information and comment on the use of digital engagement practices ("DEPs") by broker-dealers and investment advisers. The term DEP includes (i) behavioral prompts, (ii) differential marketing, (iii) gamification, which is the inclusion of game-like characteristics, (iv) features to promote retail investors' engagement and (v) related data analytics and technological tools.

The SEC stated that the purpose of the request is to:

  • help the SEC to better understand (i) which types of DEPs firms use and how often, (ii) what tools and processes are used to create and put in place DEPs and (iii) how retail investors engage with DEPs, including the demographics, trade details and performance of their investments;

  • provide interested parties with a platform for sharing their views on the benefits and drawbacks of DEPs;

  • help the SEC and its staff determine whether additional regulatory action is needed; and

  • aid the SEC in understanding how investment advisors use DEP analytical tools and related technology to advise clients.

In addition, the SEC is seeking to better understand what conflicts of interest are associated with optimization practices and if such practices impact the decision to employ DEPs for an investment recommendation. In the request, the SEC provided a short "Feedback Flyer" intended to encourage retail investors to express their opinions on DEPs.

Comments on the request must be submitted within 30 days of its publication in the Federal Register.

In a statement, SEC Chair Gary Gensler asked for comment on how to better protect investors engaging with platforms that use DEPs, including (i) what investor protections can be put in place to address potential conflicts of interest arising from DEPs that "have a statistically significant" effect on a platform's profits (and how they relate to an investment decision) and (ii) the effect of the "optimization functions" of DEP predictive data analytics on a decision to make an investment recommendation or provide investment advice.