An exhaustive and wide-ranging (91 sets of questions!) Securities and Exchange Commission Request issued on August 27 seeks information and public comment on two broad topics:

1.  Broker-dealer and investment adviser use of “digital engagement practices” (“DEPs”) when interacting with retail investors. Examples of DEPs specifically identified and described in the Release are “social networking tools; games, streaks and other contests with prizes; points, badges, and leaderboards; notifications; celebrations for trading; visual cues; ideas presented at order placement and other curated lists or features; subscriptions and membership tiers; and chatbots.” The game-like features referred to have in the last year or two been given the catchy, seemingly pejorative appellation “gamification.” See Second Amended Consolidated Class Action Complaint at pages 9-11, In re Robinhood Outage Litigation, No. 3:20-cv-01626-JD (N.D. Cal. June 30, 2021); Amended Administrative Complaint at pages 4, 12-14, In the Matter of Robinhood Financial, LLC, Massachusetts Securities Division No. E-2020-0047 (April 15, 2121) (defining “gamification” as "the application of typical elements of game playing to other activities, typically as a marketing technique to boost engagement with a product or service"); Financial Industry Regulatory Authority, 2021 Report on FINRA’s Examination and Risk Monitoring Program at pages 2, 20, 22 (Feb. 1, 2021) (“’game-like’ aspects that are intended to influence customers to engage in certain trading or other activities”).  Predictably, this aspect of the Request has garnered particular attention.  As the SEC recognizes in the Release, gamification is not unique to the securities industry.  Indeed, the Request invites comment and information comparing DEPs used in the securities industry context with “similar practices on digital platforms in other contexts (e.g., shopping, fitness, entertainment).”

In addition to information and comment on DEPs, the Request seeks information and comment on analytical and technological tools and methods that are used to build and adapt DEPs based on observable investor activities and interaction with DEPs.  Such tools and methods identified in the Release include predictive data analytics, artificial intelligence and machine learning (“AI/ML”) models (including “deep learning, supervised learning, unsupervised learning, and reinforcement learning processes”), and natural language processing and natural language generation.  Such tools and methods may be used, e.g., to analyze and improve the success of specific DEP features and practices in influencing retail investor behavior.

The Release includes an extensive discussion of regulatory issues associated with DEPs and the related tools and methods, including account opening and other approval (e.g., options, margin) obligations (anti-money laundering, know your customer, etc.), obligations attending the making of recommendations (the SEC’s Regulation Best Interest, etc.), disclosure obligations, reporting and other financial responsibility requirements, rules governing communications with the public (including advertising and marketing), supervision obligations, insider trading prevention, record-keeping obligations, and privacy and cybersecurity requirements.

Some of the Request’s question sets confirm the SEC’s interest in how development and use of DEPs is driven by precepts of and research into behavioral finance and psychology (e.g., concerning “neurological rewards systems of retail investors”).

2.  Use of technology by investment advisers to develop and provide investment advice. This portion of the Request concerns analytical tools and other technology used by investment advisers to develop and provide investment advice to clients.  Two manifestations of such technology are (1) the so-called robo-advisers (a/k/a digital investment advisers or automated advisers), which provide asset management services through online algorithm-based platforms, and (2) internet investment advisers, which solely use an interactive website to provide investment advice.  But human investment advisers also use AI/ML models or software to devise trading and investment strategies or develop investment advice, including to assess large amounts of data or to provide clients with more customized service.

The SEC disclaims that it is “expressing a view as to the legality or conformity of [the practices and methods about which it is requesting comment] with the federal securities laws and the rules and regulations thereunder, nor with the rules of self-regulatory organizations.”  Nevertheless, in places the Request reads like a sweep examination letter (e.g., “include any relevant data or information”).  One of the stated purposes of the Request is to assess “whether regulatory action may be needed . . . in connection with firms’ use of DEPs and related tools and methods.”

With the ponderous title “Request for Information and Comments on Broker-Dealer and Investment Adviser Digital Engagement Practices, Related Tools and Methods, and Regulatory Considerations and Potential Approaches; Information and Comments on Investment Adviser Use of Technology to Develop and Provide Investment Advice,” the Request can be found here:  The comment period expires October 1.

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Marlene Laro

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