Investor protection and gamification: remarks at ‘SEC Speaks’

Posted on October 29, 2021 by Editor

The 2021 SEC Speaks event, held on 12–13 October, generated a wide range of comment from staff of the US Securities and Exchange Commission (SEC), covering subjects such as digital assets, private markets, and proactive enforcement. We were particularly interested in remarks from Investor Advocate Rick Fleming, who spoke on ‘Investor Protection in the Age of Gamification: Game Over for Regulation Best Interest?’

‘Gamification’ of retail stock trading is, roughly, the use of technological tools to make trading easier and more exciting. “Broker-dealers, as well as some investment advisers, now utilize a variety of digital engagement practices, or DEPs, to connect with a broader array of retail investors, particularly younger investors who grew up with similar design features in other online apps and games on their devices,” notes Fleming. This has had positive impacts, stimulating interest in investing and lowering barriers to entry. “Technological tools have also given broker-dealers the opportunity to think more creatively about ways to educate and serve their customers.”

However, there are also downsides: “my primary concern with gamification is its potential to induce trading that is more frequent or higher-risk than an investor would choose for herself in the absence of DEPs,” says Fleming. With the SEC now beginning to investigate these concerns, he draws particular attention to the question of how the use of DEPs interacts with Regulation Best Interest, or Reg BI. This is a 2019 SEC rule that requires broker-dealers to act in customers’ best interests – but, crucially, these protections are only triggered when a recommendation is made.

The issue here is that “some DEPs, using artificial intelligence, sophisticated algorithms, and game-like features, may blur the line between solicited and unsolicited transactions. DEPs may subtly nudge investors to trade specific securities or, perhaps more likely, be designed to increase a retail investor’s trading activity generally,” with potentially significant influence on retail customers’ investment decisions. Fleming asserts that, for Reg BI to remain relevant, the SEC should make clear that such nudges should be considered recommendations, and in the longer term potentially reconsider the recommendation-based protection model. He also raises the distinction between advisers and brokers, and whether it will continue to make sense to regulate the two according to such different models.

Related themes were addressed by SEC Chair Gary Gensler in his remarks focussing on the use of predictive digital analytics in finance, and concerns around conflicts of interest, inbuilt bias and systemic risk.

Read more here and here, or dive into other SEC Speaks statements here.

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