Compliance Corner: SEC, Digital Technology Consultation, Probe

Editorial Staff

30 August 2021

Securities and Exchange Commission
The Securities and Exchange Commission is probing into how broker-dealers and investment advisors engage digitally with clients, a sign of how new technology opens up new regulatory challenges.

The US regulator said that it is “looking for information and public comment” on the issues.

Wealth managers are using tools such as behavioral prompts, differential marketing, game-like features , and other design elements or features designed to engage with retail investors on digital platforms , as well as the analytical and technological tools and methods collectively called digital engagement practices .

"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. 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."

The use of digital channels has accelerated since the pandemic broke out last year although the trend was in place years before, as seen in the rise of “robo-advisory” wealth models and the take-up of such tech by established banks and wealth managers.

The SEC said it wants to better understand of the market practices associated with firms' use of DEPs and the related analytical and technological tools and methods.