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On October 12, SEC Chair Gary Gensler stated that the agency is reviewing conflicts of interest and other risk concerns that may be associated with digital engagement practices (DEPs) employed by online brokerages and advisers. Speaking before the Practising Law Institute’s SEC Speaks conference, Gensler discussed the use of digital analytics in finance and warned attendees that DEPs used by finance platforms to tailor products to individual investors could be “transformative” and may increase access and choice, but may also introduce conflicts of interest, bias, and systemic risks if they are not closely monitored. “These modern features go beyond game-like elements, or what is sometimes called ‘gamification,’” Gensler stated. “They encompass the underlying predictive data analytics, as well as a variety of differential marketing practices, pricing, and behavioral prompts.” Use of predictive data analytics by finance platforms could raise issues with those platforms’ legal duties, he added, noting that finance platforms have an obligation “to comply with investor protections through specific duties—things like fiduciary duty, duty of care, duty of loyalty, best execution and best interest.” Using DEPs in a way that optimizes a platform’s own revenue may present a potential conflict of interest, Gensler emphasized. Gensler’s remarks follow a recent SEC request for information and public comments on the use of DEPs. As previously covered by InfoBytes, the SEC is seeking comments to better understand “what conflicts of interest may arise from optimization practices and whether those optimization practices affect the determination of whether DEPs are making a recommendation or providing investment advice.”
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