On August 27, the Securities and Exchange Commission (“SEC”) released a broad request for information and commentary on “gamification” in financial market user interfaces, including artificial intelligence and machine learning, among others.

As the press release explains: SEC requests information on

the use of “digital engagement practices” or “DEP”, including behavioral prompts, differential marketing, game-like features (commonly referred to as “gamification”) and other design elements or functionality designed to interact with retail investors on digital platforms (e.g. websites, portals and apps or “apps”), as well as the analytical and technological tools and methods used in connection with these digital engagement practices ; and the use of technology by investment advisers to develop and provide investment advice.

Exit to 1.

Examples of digital engagement practices include: social networking tools; games, sequences and other competitions with prizes; points, badges and rankings; opinion; celebrations for commerce; visual cues; ideas presented during ordering and other curated listings or features; subscriptions and membership levels; and chatbots. A variety of analytical and technological tools and methods can underpin the creation and use of these practices, such as predictive data analytics and artificial intelligence / machine learning 4 (“AI / ML”) models.

The Commission notes that companies can use these technologies to influence investor behavior or target information or services to investors on the basis of known behavioral profiles. Exit to 2-3.

The SEC notes that DEPs can influence how often investors trade, encourage additional risk (for example, trading on margin or options) and exposure to more complex products. The SEC has also expressed concern that some market players may engage in “dark models,” using the interface design to confuse or knowingly manipulate investors.

DEP entails various regulatory obligations, including:

• Account opening conditions;
• Disclosures on a variety of subjects;
• BI & CRS regulations – “best interest” obligation of brokers and related requirement to disseminate information about the nature of the account relationship;
• Supervision of complex products, for example margin and options
• Supervision and compliance in general, including algorithmic or other automated processes.

Although largely oriented towards brokerage practices, the press release includes investment advisers and robo-advisors.

The release is the latest in the continuing fallout from this winter’s Robinhood / GameStop short squeeze that rocked markets and sparked regulatory and congressional concerns.

I wrote on

In the longer term, we should expect additional regulatory responses in the form of regulation of these practices.

“Request for information and feedback on digital engagement practices of brokers and investment advisers, related tools and methods, regulatory considerations and potential approaches; Information and commentary on the use of technology by the investment adviser to develop and provide investment advice, Press releases n ° 34-92766; IA-5833; File n ° S7-10-21 (SEC August 27, 2021) is here: https://www.sec.gov/rules/other/2021/34-92766.pdf

The comment period runs for thirty days from publication and includes an abbreviated “leaflet” soliciting comments from retail investors.

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