SEC Chairman Gary Gensler has asked agency staff to look into whether persuasive features on online brokerage platforms may cross the line into investment advice and recommendations.
Gensler made the comments today to a national audience of securities attorneys at the Practising Law Institute’s “SEC Speaks” annual conference.
Gensler told the audience that he has asked staff to review whether or not certain online engagement techniques meet the definition of recommendations.
Even if they don’t, Gensler said, “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.”
If such techniques and nudges are considered recommendations, that may change the application of securities law, including possibly the application of the Investment Advisers Act, which would apply a fiduciary standard to such advice, Gensler said. While some of these activities will be covered by existing rules, changing technologies may require updates or new rules altogether, Gensler said.
The nation’s top securities cop said predictive data analytics today go beyond gamification to create marketing practices and behavioral prompts and even pricing to elicit or suggest specific investor actions that may cross the line into advice, which opens the door to conflicts of interest and potential bias. Such analytics, including machine learning, are increasingly being used to influence investor behavior across the spectrum of finance and may be “every bit as big as the internet,” he said.
But “what are they optimizing for? Gensler asked. “Are they solely optimizing for our returns as investors? Or are they optimizing for other factors, such as revenues for the platforms?” If profits and revenues for robo-advisors and online brokerage platforms are in the mix, such investors prompts may constitute an undisclosed conflict of interest, he added.
That would be particularly true if a robo-advisor steered investors “to higher-fee or more complex products, even if that isn’t in our best interest,” Gensler said.
The same could be said if an online brokerage app encouraged more trading, for which firms with online brokerage platforms such as Robinhood and Schwab earn payment for order flow. It can be true on both the broker-dealer and on the investment advisor or robo-advisor side.
“More trading, though, doesn’t always lead to higher returns. In fact, the opposite is often true. Or perhaps an app might steer us to high-risk products, options trading, or trading on margin, which may generate more revenue for the platform,” Gensler said.