SEC Advisory Committee Focuses on Digital Engagement Practices

At a meeting of the SEC Asset Management Advisory Committee, SEC officials challenged members to consider how advances in financial technologies impact investors and the advice they receive.

SEC Chair Gary Gensler highlighted the potential for predictive data analytics and other digital engagement practices ("DEPs") to change an investor's trading patterns or investment strategy. He questioned whether DEPs are maximizing investors' returns or the revenues of the platforms. Mr. Gensler reiterated concerns regarding (i) conflicts of interest when DEPs optimize for platform revenues, (ii) whether DEPs constitute recommendations or investment advice and (iii) historical biases in DEP algorithms (see related coverage here and here).

Acting Division of Investment Management Director Sarah ten Siethoff raised the SEC's request for comment on DEPs (see previous coverage here), stating that the SEC is seeking to better understand (i) the use of analytical tools and other technologies by investment advisers to provide investment advice and (ii) the impact of DEPs on advisers' interactions with their clients.

SEC Commissioner Hester M. Peirce advocated for amending the definition of "small adviser" (i.e., a firm managing less than $25 million) under IAA Rule 0-7 ("Small entities under the Investment Advisers Act for purposes of the Regulatory Flexibility Act"). She noted that almost 60 percent of advisers manage between $100 million to $1 billion, with firms as a whole having a median number of eight employees. She argued that such advisers are small firms which are significantly impacted by the costs of additional regulatory requirements.