SEC Investor Advocate Rick Fleming expressed concern that the use of digital engagement practices ("DEPs") blurs the distinction between solicited and unsolicited trading under Regulation Best Interest ("Reg BI").
At the Practising Law Institute's 2021 SEC Speaks program, Mr. Fleming emphasized that the 2019 adoption of Reg BI predated this new "gamification era," explaining that a broker-dealer who does not give a specific trading recommendation to a retail investor does not trigger the Reg BI standard of conduct obligations (i.e., a disclosure obligation, a care obligation, a conflict of interest obligation and a compliance obligation). Mr. Fleming argued that the future utility of Reg BI will depend on whether the SEC clarifies that a DEP used to "nudge" retail investors - regardless of whether the nudge is toward a specific security or generally used to increase the investor's trading activity - constitutes a "recommendation."
If the SEC cannot make such a clarification given the variety of existing DEPs, Mr. Fleming said, then the SEC should "go back to the drawing board" to address the downsides of a recommendation-specific rulemaking.
Mr. Fleming also questioned whether a clear enough distinction remains between an investment adviser and a broker-dealer to merit two distinct regulatory models. As more online discount brokers use DEPs to influence retail investors, Mr. Fleming called on the SEC to "brighten" the line between advisers and brokers.
Mr. Fleming acknowledged that positive developments in trading technology have made it possible for "younger and less experienced investors" to enter the securities markets, including investors from "disadvantaged communities."
The SEC issued a request for information and comment on the use of digital engagement practices by broker-dealers and investment advisers.
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