SEC Eyes Data Collection Conflicts in New Comment Request

The U.S. Securities and Exchange Commission (SEC) is requesting information and public comments on the use of digital engagement practices by broker/dealers (B/Ds) and investment advisers.

The SEC’s information request refers to digital engagement practices as “DEPs,” for short, and notes that B/Ds and registered investment advisers (RIAs) have increasingly embraced DEPs that include behavioral prompts, differential marketing, game-like features (i.e., gamification) and other design elements meant to attract and retain investors’ interest.

“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 wrote in a statement published alongside the information request. “In many cases, these features may encourage investors to trade more often, invest in different products or change their investment strategy.”

Gensler notes that the rapidly growing use of predictive analytics and other DEPs may be designed with the goals of increasing revenues and collecting consumer data for use in sales-related contexts.

“This may lead to conflicts between the platform and investors,” Gensler warns. “I’m interested in the answers to the many questions included in the request for comments, and I’m particularly focused on how we protect investors engaging with technologies that use DEPs.”

The statement affirms that the SEC is issuing the request, in part, 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 further hoping to learn what conflicts of interest may arise from optimization practices and to what degree DEPs are involved in a registered entity’s recommendations and advice.

At the same time, the comment request asks directly about the potential benefits DEPs provide to investors. Gensler says the responses will be used to “facilitate the commission’s assessment of existing regulations and consideration of whether regulatory action may be needed to further the commission’s mission.”

The public comment period will remain open for 30 days following publication of the request in the Federal Register. In addition to seeking adviser and B/D input, the SEC’s request encourages retail investors to comment on their experiences by using this digital form. The full text of the comment request is available here.

Among other things, the SEC says it is seeking to determine:

• The extent to which firms use DEPs;
• The types of DEPs most frequently used;
• The tools and methods used to develop and implement DEPs;
• Information pertaining to retail investor engagement with DEPs, including any data related to investor demographics, trading behaviors and investment performance;
• Oversight of this technology;
• How investment advisers and clients have been affected by DEPs;
• The potential risks to investment advisers, clients and the markets more generally related to this technology; and
• Whether regulatory action may be needed to enhance investor protection while preserving the ability of investors to benefit from investment advisers’ use of technology.