In remarks this week to SEC Speaks, SEC investor attorney Rick Fleming thought the “gamification” of securities trading could present undue risk that exploits a potential loophole in interest regulation. higher (“Reg. BI”).
Recall that Reg. BI, adopted in 2019, imposes a “best interest” standard of conduct on brokers when recommending any securities transaction or investment strategy to a retail client. (The adoption version). Reg. BI was born after many years of struggling to try to harmonize the standard of fiduciary duty for investment advisers with the standard of “suitability” for brokers. Its passage was accelerated by the efforts of the Department of Labor to anticipate the action of the SEC with its own “fiduciary rule”.
Then GameStop’s short-term imbroglio in early January 2021 and the rise of application-based brokerage services brought the notion of “gamification” to the fore. Last August, the SEC asked for information and comment on “gamification.” I discussed this outing here.
In the statement, the SEC invited comments on nine categories of digital engagement practices (“DEPs”) related to securities trading: (i) social networking tools, (ii) games, footage and other contests with awards, (iii) points, badges and rankings, (iv) notifications, (v) celebrations for commerce, (vi) visual cues, (vii) ideas presented when placing orders and other curated listings or features, (viii) subscriptions and membership levels, and (ix) chatbots.
Investor attorney Fleming said his “primary concern with gamification is its potential to induce more frequent or riskier trades than an investor would choose for themselves in the absence of a DEP.” Fleming said he was particularly concerned that gamification could open a loophole in Reg. BI:
What concerns me is that some DEPs, using artificial intelligence, sophisticated algorithms and gaming features, can blur the line between solicited and unsolicited transactions. DEPs can subtly entice investors to trade specific securities or, perhaps more likely, be designed to increase the trading activity of a retail investor in general, even if they don’t seem to be recommending a specific security. In my opinion, it appears that the use of certain DEPs, by gamifying securities trading for retail clients, could significantly influence the investment decisions of those retail clients in a way that was not fully considered when the Commission adopted Reg BI with its important distinction between solicited and unsolicited trade. This leaves open the possibility that investors may not benefit from the protections of Reg BI even if they are influenced to engage in securities transactions.
Fleming’s remarks are here.
On the other hand, the Securities and Financial Markets Association (“SIFMA”) said in its Oct. 1 comment letter to the SEC that DEPs are just another development in the markets, are already subject to rules. well established and no new rules, guidance or interpretation are needed:
Used responsibly, DEPs offer significant benefits to retail investors, including improved access to personalized products and services, lower costs, access to a wider range of products, better customer service and compliance efforts. improvements leading to more secure markets. Some DEPs also raise potential risks, highlighting the need to ensure investor protection in the course of their use. The existing and robust regulatory regime, however, deals extensively with the use of DEPs by businesses today, preserving their well-documented benefits, while appropriately managing potential risks and conflicts. Specifically, the main intersection between DCs and our current regulatory regime lies in two distinct areas:
- communications to retail investors (education, information, advertising and marketing); and
- potential recommendations (i.e. personalized investment advice) to retail investors.
The SIFMA comment letter, at 2, is here.
Stay tuned. Although the comment period is over, the game is not over.