The U.S. Securities and Exchange Commission (SEC) is seeking information and public comment on the use of digital engagement practices (DEPs) by broker-dealers and investment advisers.
Digital engagement practices or DEPs may include behavioral prompts, differential marketing, game-like features (also known as gamification), and other design features that seek to engage retail investors on digital platforms. They also include analytical and technological tools and methods.
“While new technologies can bring us greater access and product choice, they also raise questions as to whether we as investors are appropriately protected when we trade and get financial advice,” SEC Chair Gary Gensler said. “In many cases, these features may encourage investors to trade more often, invest in different products, or change their investment strategy. 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.”
The commission is seeking feedback to develop a better understanding of the market practices associated with firms’ use of DEPs and the related analytical and technological tools and methods. The SEC is also hoping to learn what conflicts of interest may arise from optimization practices and whether optimization practices affect the determination of whether DEPs are making a recommendation or providing investment advice.
Further, the request for information is intended to provide a forum for investors, market participants, and other interested parties to share their perspectives on the use of DEPs. This includes potential benefits as well as concerns. Overall, this process will facilitate the SEC’s assessment of existing regulations and help it determine if regulatory action may be needed.
“I’m interested in the varied questions included in the Request for Comment, and I’m particularly focused on how we protect investors engaging with technologies that use DEPs,” Gensler said.
The public comment period will remain open for 30 days following publication of the request in the Federal Register.