What You Need to Know
- Design elements and psychological nudges associated with digital engagement platforms can become recommendations, SEC Chair Gary Gensler says.
- Appropriate investor protection guardrails may need to be considered.
- The application of digital analytics raises new questions about conflicts of interest.
SEC Chairman Gary Gensler questioned Tuesday when design elements and psychological nudges associated with digital engagement platforms, or DEPs, “cross the line” and become recommendations.
“The answer to that question is important, because that might change the nature of the platform’s obligations under the securities laws,” Gensler said Tuesday at the Practising Law Institute’s SEC Speaks event.
“Even if certain practices might not meet the current definition of recommendation, I believe they raise a question as to whether there are some appropriate investor protection guardrails to consider, beyond simply the application of antifraud rules,” Gensler said.
These modern DEP features, Gensler continued, “go beyond game-like elements, or what is sometimes called ‘gamification.’ They encompass the underlying predictive data analytics, as well as a variety of differential marketing practices, pricing and behavioral prompts.”
While these developments, he continued, “can increase access and choice, they also raise important public policy considerations, including conflicts of interest, bias and systemic risks.”
Predictive data analytics, Gensler said, “including machine learning, are increasingly being adopted in finance — from trading, to asset management, to risk management. Though we’re still in the early stages of these developments, I think the transformation we’re living through now could be every bit as big as the internet was in the 1990s.”
In the case of brokerage apps, robo-advisors or online investment advisors, “when they use certain digital engagement practices, what are they optimizing for?” Gensler asked.
“Are they solely optimizing for our returns as investors? Or are they also optimizing for other factors, including the revenues of the platforms?”