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Investor Protection in the Age of Gamification: Game Over for Regulation Best Interest?

Washington D.C.

Oct. 13, 2021

Remarks at SEC Speaks

Welcome back to Day 2 of SEC Speaks. It is good to be with you all, and I look forward to seeing everyone again in person soon.

Of course, like all the speakers at this conference, let me remind you that the views I express are my own and do not necessarily reflect the views of the Commission, the Commissioners, or my colleagues on the Commission staff.[1]

Let me start by recognizing the staff in the Office of the Investor Advocate. They recently were honored with the prestigious Chair’s Award for Investor Protection, and I appreciate Chair Gensler’s acknowledgement of their efforts to serve investors. It is my privilege to hold the official title of Investor Advocate, but each team member in our office works hard every day to advocate for the best interests of investors.

As you may recall, one of those team members, SEC Ombudsman Tracey McNeil, substituted for me at this conference last year, so the last time I addressed this gathering was in April of 2019. And as I reflect on the intervening 2 ½ years, it is hard to describe the sea changes that have occurred at the SEC and in our markets over that period.

One significant event since I last spoke here was the adoption of Regulation Best Interest or “Reg BI” two months later, in June of 2019.[2] As I said at the time, Reg BI seemed to be a step in the right direction because it included several improvements over the suitability standard for broker-dealers.[3] However, the rapid evolution of the broker-dealer business model now leaves me wondering whether Reg BI was worth the effort after all. Although well-intentioned, recent events expose what may be a significant flaw in Reg BI.

This brings us to another major development since 2019—that is, the so-called “gamification” of retail stock trading. This is not a precise term, but it refers generally to the use of technological tools to make trading easier and more exciting. Broker-dealers, as well as some investment advisers, now utilize a variety of digital engagement practices, or DEPs, to connect with a broader array of retail investors, particularly younger investors who grew up with similar design features in other online apps and games on their devices.

Although they have been used in other contexts, “DEPs” in the securities industry sprung into the national consciousness at the beginning of this year, when unexpected and unprecedented retail trading in a number of public companies attracted media and Congressional attention.[4] The Commission continues to study the market events of January 2021 and is appropriately considering the implications for rulemaking in a number of areas.

On the bright side, the events in January confirmed a positive trend our office has been tracking during the pandemic—a growing interest by retail investors in investing in the stock market. In part, this may be a reflection of historic stimulus payments coupled with pandemic-inspired lockdowns, but broker-dealers have encouraged this trend by reducing or eliminating commissions,[5] selling lower-cost fractional shares, reducing or eliminating account minimums, and yes, by making it more fun to trade.

These developments have lowered the barriers to entry for investors, particularly those of limited means. In response to a survey conducted by the FINRA Investor Education Foundation in the fall of last year, younger and less experienced investors reported that two developments -- market dips that made stocks cheaper to buy and the ability to invest with small amounts – were among the top reasons they entered the stock market during the year.[6] These lower barriers to entry, in turn, create greater access to the financial markets for all investors, including those from disadvantaged communities. I note that the SEC’s Investor Advisory Committee, on which I sit, recently recommended that we at the Commission devote greater resources to helping financial services firms expand and improve their ability to encourage investment by under-represented communities in a variety of ways, from investor education and direct outreach to strategic marketing of financial services to these communities.[7]

Technological tools have also given broker-dealers the opportunity to think more creatively about ways to educate and serve their customers. Using DEPs, well-meaning brokers can require customers to engage with important educational content before making important decisions, and they can imbed warnings to help investors avoid making foolish decisions such as incurring unnecessary taxes. So, as we turn now to some of the downsides of gamification, I hope we can enhance investor protections without undermining investor participation in the markets or constraining the positive uses of DEPs.

With that said, my primary concern with gamification is its potential to induce trading that is more frequent or higher-risk than an investor would choose for herself in the absence of DEPs. In my view, to regulate this new generation of online brokers effectively, we need to fully understand the scope of DEPs in the industry and how they influence investor behavior and decision making. And, to its credit, the Commission has begun this process by issuing a recent Request for Information and Comment on the use of DEPs.[8] In the Request, the Commission sought information on a number of topics related to DEPs, including behavioral prompts, differential marketing, game-like features, and other elements or features designed to engage with retail investors on digital platforms. As the Commission and public begin to digest the numerous responses to the Request, I want to highlight a significant issue that the Commission must consider as part of this – how does the use of DEPs intersect with Reg BI?[9]

As most of you know, Reg BI generally requires that, when broker-dealers make recommendations of securities transactions or strategies involving securities to retail customers, they must act in the customer’s best interest and not place the broker-dealer's interests ahead of the customer's.[10] Under Reg BI, any broker making a recommendation to its customer needs to comply with four component obligations: a disclosure obligation; a care obligation; a conflict of interest obligation; and a compliance obligation. Combined, these obligations enhance the broker-dealer standard of conduct and attempt to align with retail customers’ reasonable expectations of how their brokers should act in the customers’ interest. However, these important investor protections are not triggered by just any interaction between the broker and its customer—there must be a recommendation. As the Commission noted in the adopting release, Reg BI was not intended to “apply to self-directed or otherwise unsolicited transactions by a retail customer” (emphasis added).[11] So, when a retail customer independently directs their broker to make a trade without any related recommendation, the broker does not have to consider any of the component obligations in carrying out the trade.

The concern I have is that some DEPs, using artificial intelligence, sophisticated algorithms, and game-like features, may blur the line between solicited and unsolicited transactions. DEPs may subtly nudge investors to trade specific securities or, perhaps more likely, be designed to increase a retail investor’s trading activity generally, even when not appearing to recommend a specific security. In my view, it appears that the use of certain DEPs, by gamifying securities trading for retail customers, could significantly influence these retail customers’ investment decisions in ways that were not fully contemplated when the Commission adopted Reg BI with its important distinction between solicited and unsolicited trading.[12] This leaves open the possibility that investors would not receive the benefit of Reg BI protections even though they are being influenced to engage in securities transactions.

When Reg BI was adopted in the pre-gamification era, I observed that the utility of Reg BI would ultimately depend upon how it is enforced by the Commission and FINRA.[13] In my view, for Reg BI to remain a relevant and useful regulation in this era of gamification, the Commission should make clear that “recommendations” include instances where a broker-dealer utilizes DEPs to nudge investors in a way that reasonably could be viewed as encouraging trading, and the Commission should use its enforcement authority to back up its position.

This is easier said than done, of course. With such a vast array of DEPs that continue to evolve, applying the facts and circumstances to determine whether any particular DEP or combination of DEPs arise to the level of a “recommendation” will be challenging and could consume a lot of Commission resources. And litigation in a gray area like this is always risky.

But, investors need the protection of Reg BI in this new world in which they are being pushed or pulled by the platforms they utilize to access the markets. To me, it appears the DEPs are being used in ways that make the distinction between solicited and unsolicited trades almost meaningless, and brokers’ obligations under Reg BI should not turn on whether the customer technically initiates the trades after the broker has used subtle techniques to influence the customer to engage in active trading, trade on margin, trade options, and engage in other risky practices. In the end, then, if Reg BI proves to be inadequate to protect investors, I believe the Commission should go back to the drawing board so that its critical investor protections no longer rise and fall on whether the broker-dealer made a specific recommendation.

Before wrapping up, let me briefly open up one more can of worms related to this issue. And that is, what is the difference between an investment adviser and broker-dealer as we approach the end of 2021? For years now, I have struggled to explain the difference between a full-service broker and an investment adviser because in my view the Commission has allowed brokers to do virtually everything that an adviser does, notwithstanding the fact that brokers are excluded from the definition of an investment adviser only if their advice is “solely incidental” to their brokerage business. But now it seems that most if not all of the on-line discount brokers are influencing investor behavior with digital engagement practices, which further blurs the line between providing investment advice and traditional brokerage service. At some point, if the Commission fails to brighten the distinction between advisers and brokers, it will make little sense to regulate the two with such distinct regulatory models.

Thank you again for the opportunity to share my thoughts with you this morning. I look forward to the remainder of the program.

[1] The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author’s views and does not necessarily reflect those of the Commission, the Commissioners or other members of the staff.

[2] See Final Rule, Regulation Best Interest, Exchange Act Release No. 86031 (June 5, 2019), 84 Fed Reg. 33318 (July, 12, 2019) (File No. S7-07-18), (hereafter, “Regulation Best Interest Adopting Release”).

[3] See Statement Regarding the SEC’s Rulemaking Package for Investment Advisers and Broker-Dealers, Rick A. Fleming, Investor Advocate (June 5, 2019), available at (hereafter, “Reg BI Statement”).

[4] See Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide: Hearing Before the H. Comm. on Fin. Servs., 113th Cong. (2021),​calendar/​eventsingle.aspx?​EventID=​407107.

[5] The Office of the Investor Advocate continues to study the impact of zero-commission trading, which typically involves compensation to the broker-dealer through “payment for order flow.” This type of compensation may be less transparent to the retail investor and may raise other concerns, such as the movement of retail trading away from traditional stock exchanges. Our office also continues to evaluate the impact of selling fractional shares to retail customers.

[6] See FINRA Investor Education Foundation, Investing 2020: New Accounts and

the People Who Opened Them (February 2021),

[7] See Investor Advisory Committee, Recommendations regarding Minority and Underserved Inclusion

in Investment and Financial Services (March 11, 2021),

[8] See Request for Information and Comments on Broker-Dealer and Investment Adviser Digital Engagement Practices, Related Tools and Methods, and Regulatory Considerations and Potential Approaches; Information and Comments on Investment Adviser Use of Technology To Develop and Provide Investment Advice, Securities Exchange Act Release No. 92766 (August 27, 2021), 86 Fed Reg. 49067 (Sept. 1, 2021), available at (hereafter, “DEP Request for Comment”).

[9] The Commissions’ recent Request for Comment does call attention to this general concern, and notes that whether the use of a DEP may be a recommendation depends on the relevant facts and circumstances’ surrounding the broker’s use of any particular DEP. See DEP Request for Comment, supra note 4, 86 Fed Reg. at 49075 (The use of a DEP by a broker-dealer may, depending on the relevant facts and circumstances, constitute a recommendation for purposes of Reg BI. Whether a “recommendation” has been made is interpreted consistent with precedent under the federal securities laws and how the term has been applied under FINRA rules.)

[10] See Regulation Best Interest Adopting Release, supra note 2.

[11] See Regulation Best Interest Adopting Release, 84 Fed Reg. at 33335.

[12] See, e.g., DEP Request for Comment, supra note 4, 86 Fed Reg. at 49078 (Do broker-dealers consider the observable impacts of DEPs when determining if they are making “recommendations” for purposes of Reg BI? How does the fact that a DEP might impact the behavior of a statistically significant number of retail investors affect this determination? What statistical concepts, tools, and quantitative thresholds do broker-dealers use in making this determination?”).

[13] See Reg BI Statement, supra note 3.

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