The Securities and Exchange Commission (“SEC”) recently issued a request for information and public comment on the use of new and emerging technologies by investment advisers and broker-dealers that suggests potential regulatory action to come.[1] According to its release, the SEC is seeking to understand how registrants — whether online brokerages, robo-advisers, internet investment advisers, or more traditionally-operated firms — use various digital engagement practices, interactive websites and mobile applications, or artificial intelligence to serve retail investors. 

Through this request, the SEC is scrutinizing how these technological developments help firms engage with their customers and give them access to the securities markets as well as challenge those firms’ ability to comply with their regulatory obligations. To that end, the request includes over 90 numbered questions and the SEC’s current observations about registrants’ adoption of financial technology (“Fintech”). For example, the release notes that, while certain digital engagement practices (or “DEPs” as coined by the SEC) may help democratize retail investing, they may also lead to investment activity that is inconsistent with a retail customer’s goals or risk tolerance through targeted advertising or dark patterns (which also has been a recent focus of the Federal Trade Commission[2]). SEC Chair Gary Gensler underscored this risk and the need to protect against potential conflicts of interest, stating: “While these 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.” [3] The release also notes that the use of Fintech may present firms with new — and perhaps unanticipated — challenges to their data privacy, cybersecurity, and standard of conduct obligations. 

Significantly, the release announces the SEC’s intention to “assess[] … existing regulations and consider[] … whether regulatory action may be needed” to address the industry’s increasing adoption of these technological developments. Any firm employing any of the following Fintech practices should carefully consider how this regulatory scrutiny could challenge their operations and take the opportunity, as requested by the SEC, to help the Commission understand the benefits of employing emerging technologies for retail investors.

• Predictive data analytics, artificial intelligence, or machine learning
• Social networking tools
• Games, streaks, and other contests with prizes
• Points, badges, and leaderboards
• Text or app notifications
• Celebrations for trading
• Visual cues on user interfaces
• Ideas presented at order placement and other curated lists or features
• Subscription and membership tiers
• Chatbots

The public comment period ends on October 1, 2021. BakerHostetler’s Securities Enforcement Defense, Digital Assets and Data Management, Investment Funds, and Financial Services teams are comprised of partners who have served in the SEC’s Enforcement Division and the SEC’s Office of the General Counsel as well as attorneys with extensive Fintech experience who can help investment advisers and broker-dealers understand what this release means to their business and participate in the public comment process. If you have any questions about this alert, please feel free to contact any one of our experienced professionals.