December 6, 2021

Volume XI, Number 340

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December 03, 2021

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SEC Requests Comment on Broker-Dealer and Investment Adviser Digital Engagement Practices

On August 27, 2021, the SEC requested information and public comment on the use of digital engagement practices (DEPs) by broker-dealers and investment advisers. DEPs include items such as behavioral prompts, differential marketing, gamification features and other elements or features designed to engage retail investors on digital platforms such as websites, portals and applications, and by providing asset management services through “robo-advising” or the use of algorithm-based platforms. The SEC encouraged industry market participants and retail investors to share their perspectives on the use of DEPs. 

In the request for comment, the SEC stated its desire to understand and evaluate:  

  • the extent to which firms use DEPs; 

  • the types of DEPs most frequently used; 

  • the tools and methods used to develop and implement DEPs; and 

  • information pertaining to retail investor engagement with DEPs, including any data related to investor demographics, trading behaviors and investment performance.  

In an accompanying press release, the SEC stated that the request for comment will facilitate the SEC’s assessment of existing regulations and consideration of whether regulatory action may be needed.

Although the comment period has ended, the SEC’s request demonstrates the SEC’s interest in DEPs in light of the recent “meme stock investing” that occurred in stocks such as AMC Entertainment and GameStop earlier this year.  The request was also foreshadowed by SEC Chair Gary Gensler’s Congressional testimony in May 2021 on “meme stock investing” and its connection to easy-to-use trading apps and the use of artificial intelligence tools and other algorithms to curate investor experiences.  Overall, it appears the SEC is trying to evaluate broker-dealers’ and investment advisers’ use of digital platforms designed to provide retail investors with greater market access and product choices, and the potential bias these platforms and DEPs may have to increase revenue, collect data and track and affect the amount of time a customer spends on any platform.  

There has already been industry pushback through the public comment process.  SIFMA, the industry trade group that represents market participants, commented that the existing regulatory framework of SEC and FINRA rules already addresses the use of DEPs, and therefore any new rules, guidance or interpretations would be unnecessary to regulate DEP usage.  

The SEC’s press release announcing the request for information and public comment is available here.

© 2021 Vedder PriceNational Law Review, Volume XI, Number 288
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About this Author

Shareholder

Wayne M. Aaron is a Shareholder at Vedder Price and a member of the firm’s Investment Services group and Corporate practice area in the New York office.

An experienced securities regulatory lawyer, Mr. Aaron represents financial services firms, management, and other personnel in regulatory and governmental investigations and internal investigations. His varied practice spans financial services advisory matters, broker-dealer regulation and enforcement, government and regulatory investigations, and FinTech.

Mr. Aaron...

212-407-7640
David Soden Investment Attorney Vedder Price Chicago
Associate

David W. Soden is an Associate at Vedder Price and a member of the firm’s Investment Services and Litigation practice groups in the Chicago office.

His practice includes the representation of broker-dealers, investment advisers, family offices, private funds, registered mutual funds, closed-end funds, exchange-traded funds and other financial institutions on a broad range of legal, regulatory, governance, formation, and compliance matters.

Mr. Soden has significant experience in regulatory and compliance matters affecting broker-dealers, investment advisers, investment...

312-609-7793
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