The SEC wants to take a closer look at how broker-dealers
and RIAs use digital tools to engage investors.
The agency issued a request for information and public
comment on so-called “digital engagement practices” used by the financial
services industry. These include behavioral prompts, marketing techniques,
gamification features and the design elements of retail-facing websites,
portals and apps, according to an SEC statement.
Retail stock trading app Robinhood in particular has faced
criticism from the SEC, FINRA and legislators for deploying gamification
techniques to encourage investors to make trades. In June, the company paid $70
million for allegedly providing false information to customers. And the SEC has
been increasing scrutiny on digital advice, with SoFi’s robo getting hit with a
$300,000 fine in August and Charles Schwab announcing in July it set aside $200
million for a probe into its Intelligent Portfolios product.
"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," said SEC
chairman Gary Genlser in a statement. "In many cases, these features may
encourage investors to trade more often, invest in different products or change
their investment strategy.”
In addition to gamification, which Gensler pledged to target
following the GameStop and AMC trading frenzy earlier this year, the SEC is
also concerned with potential conflicts that arise from predictive analytics
and optimization practices employed to increase revenues, data collection and
time spent on digital investment platforms, Gensler said.
The request for comment also mentions tools used by
financial advisors to develop and provide advice through online platforms or as
part of a traditional client relationship.
While the SEC could review how traditional advisors use
financial planning and data aggregation tools with clients, the primary focus
will likely be on the fast-growing, retail-facing fintech startups, said Max
Schatzow, a partner with law firm Stark & Stark who concentrates on
financial services firms. The regulator made its first enforcement actions
against robo advisors in 2018; now it wants to expand the focus to the growing
presence of DIY trading tools.
“I think this is a clear counterpunch to the GameStop and
AMC trading issues, and Robinhood being in the news a lot recently,” Schatzow
said. “Gensler is mindful about what technology has been doing to the
[financial] advice landscape over the years.”
Ben Marzouk, a financial services attorney with Eversheds
Sutherland, agrees, adding that the digital client engagement tools traditional
advisors use are already subject to existing regulatory oversight. However, new
hybrid business models that combine digital self-service tools with human
advice could be impacted by a future SEC rule, Marzouk said.
Firms also need to think about how the technology they use
collects, stores and shares client data, as the SEC could be looking to hold
advisors accountable for how that data is used to inform product
recommendations and financial advice, he said.
There is a need to update some SEC rules that don’t
adequately cover new technology, Schatzow added. For example, chatbots don’t
fit neatly within existing advertising rules and are mostly used for customer
service, but they can be used to recommend products and potentially generate
“It’s certainly long overdue to review all these rules with
an eye to the change in technology over the years,” he said.
This emphasis on digital customer engagement could impact
the SEC’s interpretation of Reg BI rule, particularly when it comes to how
technology pushes customers toward opening accounts, Marzouk said. Fintechs are
increasingly pushing the envelope with incentives and behavioral nudges,
blurring the line between advertising and financial advice that would fall
under a best-interest standard.
“When it comes to account opening, there’s quite a bit of
gamification. I see offers all the time about getting free stocks for a new
account or for recommending a friend to join [a trading app],” he said. “I
think they want to see whether it’s practical to expand the scope of a
financial recommendation to include these types of behavioral prompts.”
Even if the SEC’s request for comment doesn’t directly
impact traditional financial services firms, Schatzow said it’s a chance for
advisors to weigh in on what the future of the industry looks like and level
the playing field with “move-fast-and-break-things” startups.
“[Advisors] can put their foot down and say we need some
additional rules and guardrails, otherwise these [fintech startups] are going
to keep pushing the limits,” Schatzow said. “They all want to grow, but some of
these tech-focused companies have shown they’re willing to grow at almost any
The public comment period will be open for 30 days following
the publication of the request in the federal register. The SEC also has a
questionnaire for retail investors to share their experiences with digital
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