Reg BI should be updated to combat gamification: SEC Investor Advocate

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October 13, 2021

The Securities and Exchange Commission must refine the distinction it makes between investment advisers and brokers, as well as broaden the way it enforces regulation in the best interests, in order to effectively counter the corrosive influence of gamification on investor protection, the Federal Investor Investor agency told an online hearing on Wednesday. .

Recognizing that his proposals amounted to opening a ‘box of worms’, the growth of artificial intelligence, sophisticated algorithms and gaming features on online trading platforms had precipitated the need for further reforms, Rick Fleming, who started as the SEC Advocate’s first investor in 2014, said in an online conference with presentations by other SEC officials at The SEC Speaks of the Practicing Law Institute in 2021.

“[N]Now it appears that most if not all online discount brokers are influencing investor behavior with digital engagement practices, further blurring the line between providing investment advice and traditional brokerage service ”, Fleming said. “At some point, if the Commission fails to clarify the distinction between advisers and brokers, it will make little sense to regulate the two with such distinct regulatory models. “

Broker-traders register with the Financial Investments Regulatory Authority and are regulated by it; investment advisers register and are regulated by the SEC. Reg BI prohibits brokers from putting their own interests above their clients and requires them to identify conflicts of interest, but investment advisers must also follow additional and stricter fiduciary standards.

To address Reg BI’s shortcomings, the SEC may have to “go back to the drawing board,” Fleming argued.

When the SEC adopted Reg BI in June 2019, the federal agency specifically noted that the rule “was not intended to” apply to self-directed or unsolicited transactions by a retail client, “” Fleming noted. But times have changed quickly as online platforms “blur the line between solicited and unsolicited transactions,” he noted.

“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. “, he added. “[T]he rapidly changing broker-dealer business model now leaves me wondering if Reg BI was worth it after all.

Another former securities industry enforcement official praised Fleming’s proposal to better enforce Reg BI. Similar ideas have been the subject of “active discussions in the SEC building over the past year,” said Brad Bennett, former head of law enforcement at the Financial Industry Regulatory Authority. Finding ways to apply Reg BI to online platforms is “the easiest way to manage it because you don’t need new rules,” Bennett added.

Fleming made his remarks following the fact that SEC Chairman Gary Gensler has continued in recent weeks to step up pressure on trading apps and robotic advisory platforms, doubling in September on the skepticism he has previously expressed about gamification and DEP tactics.

Meanwhile, Gensler and Gurbir Grewal, director of the SEC’s Division of Enforcement, both of whom spoke at the PLI event, have stressed in recent weeks that the agency will increase regulations, fines and penalties as a more effective deterrent against misconduct.


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