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, 49067-49087 [2021-18901]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 86, Number 167 (Wednesday, September 1, 2021)]
[Notices]
[Pages 49067-49087]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-18901]


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SECURITIES AND EXCHANGE COMMISSION

[Release Nos. 34-92766; IA-5833; File No. S7-10-21]
RIN 3235-AN00


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

AGENCY: Securities and Exchange Commission.

ACTION: Request for information and comment.

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SUMMARY: The Securities and Exchange Commission (the ``Commission'' or 
the ``SEC'') is requesting information and public comment (``Request'') 
on matters related to: Broker-dealer and investment adviser use of 
``digital engagement practices'' or ``DEPs'', including behavioral 
prompts, differential marketing, game-like features (commonly referred 
to as ``gamification''), and other design elements or features designed 
to engage with retail investors on digital platforms (e.g., websites, 
portals and applications or ``apps''), as well as the analytical and 
technological tools and methods used in connection with these digital 
engagement practices; and, investment adviser use of technology to 
develop and provide investment advice. In addition to or in place of 
responses to questions in this release, retail investors seeking to 
comment on their experiences may want to submit a short Feedback Flyer.

DATES: Comments should be received on or before October 1, 2021.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.htm); or
     Send an email to [email protected]. Please include 
File No. S7-10-21 on the subject line.

Paper Comments

     Send paper comments to Secretary, Securities and Exchange 
Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-10-21. This file number 
should be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method of submission. The Commission will post all 
comments on the Commission's website (https://www.sec.gov). Comments are 
also available for website viewing and printing in the Commission's 
Public Reference Room, 100 F Street NE, Washington, DC 20549, on 
official business days between the hours of 10 a.m. and 3 p.m. 
Operating conditions may limit access to the Commission's public 
reference room. All comments received will be posted without change. 
Persons submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make publicly available. 
Retail investors seeking to comment on their experiences with online 
trading and investing platforms may want to submit a short Feedback 
Flyer, available at Appendix A.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this Request. A 
notification of the inclusion in the comment file of any such materials 
will be made available

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on the Commission's website. To ensure direct electronic receipt of 
such notifications, sign up through the ``Stay Connected'' option at 
www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Division of Trading and Markets, 
Office of Chief Counsel, at (202)-551-5550 or 
[email protected]; Division of Investment Management, 
Investment Adviser Regulation Office at (202) 551-6787 or 
[email protected].

SUPPLEMENTARY INFORMATION: The Commission is requesting information and 
public comment on matters related to (1) broker-dealer and investment 
adviser use of digital engagement practices on digital platforms, as 
well as the analytical and technological tools and methods used in 
connection with such practices; and (2) investment adviser use of 
technology to develop and provide investment advice.

I. Introduction

A. Background

    With the advent and growth of digital platforms for investing, such 
as online brokerages and robo-advisers, and more recently, mobile 
investment apps and portals, broker-dealers and investment advisers 
(referred to collectively as ``firms'') have multiplied the 
opportunities for retail investors to invest and trade in securities. 
This increased accessibility has been one of the many factors 
associated with the increase of retail investor participation in U.S. 
securities markets in recent years.
    As discussed in Section II of this Request, firms employ a variety 
of digital engagement practices when interacting with retail investors 
through digital platforms. Examples of digital engagement practices 
include: Social networking tools; games, streaks and other contests 
with prizes; points, badges, and leaderboards; notifications; 
celebrations for trading; visual cues; ideas presented at order 
placement and other curated lists or features; subscriptions and 
membership tiers; and chatbots.
    Various 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 (``AI/ML'') 
models. Firms may use these tools to analyze the success of specific 
features and practices at influencing retail investor behavior (e.g., 
opening new accounts or obtaining additional services, making 
referrals, increasing engagement with the app, or increasing trading). 
Based on the results obtained from such AI/ML models and data 
analytics, firms may tailor the features with which different retail 
investor segments interact on the firms' digital platforms, or target 
advertisements to specific investors based on their known behavioral 
profiles.
    As discussed in Section III of this Request, some investment 
advisers also use these tools to develop and provide investment advice, 
including through online platforms or as part of more traditional 
investment advisory services. Investment advisers can use analytical 
tools to learn more about their clients and develop and provide 
investment advice based on that information. These developments may 
provide potential benefits and risks for investment advisers and their 
clients.

B. Purpose of Request

    The Commission is issuing this Request related to the use and 
development of digital engagement practices by firms on their digital 
platforms, in order to:
    1. Assist the Commission and its staff in better understanding and 
assessing the market practices associated with the use of DEPs by 
firms, including: (1) The extent to which firms use DEPs; (2) the types 
of DEPs most frequently used; (3) the tools and methods used to develop 
and implement DEPs; and (4) information pertaining to retail investor 
engagement with DEPs, including any data related to investor 
demographics, trading behaviors, and investment performance.
    2. Provide a forum for market participants (including investors), 
and other interested parties to share their perspectives on the use of 
DEPs and the related tools and methods, including potential benefits 
that DEPs provide to retail investors, as well as potential investor 
protection concerns.\1\
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    \1\ To further enable retail investors to share their 
perspectives, the Commission is issuing a user-friendly ``Feedback 
Flyer.'' The Commission has determined that this usage is in the 
public interest and will protect investors, and therefore is not 
subject to the requirements of the Paperwork Reduction Act of 1995. 
See Sections 19(e) and (f) of the Securities Act of 1933 
(``Securities Act''), 15 U.S.C. 77s(e) and (f). Additionally, for 
the purpose of developing and considering any potential rules 
relating to this rulemaking, the agency may gather from and 
communicate with investors or other members from the public. See 
Securities Act section 19(e)(1) and (f), 15 U.S.C. 77s(e)(1) and 
(f).
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    3. Facilitate an assessment by the Commission and its staff of 
existing regulations and consideration of whether regulatory action may 
be needed to further the Commission's mission including protecting 
investors and maintaining fair, orderly, and efficient markets in 
connection with firms' use of DEPs and related tools and methods.
    In addition to addressing the questions below, the Commission 
encourages commenters to provide or identify any data and other 
information in furtherance of the purposes articulated in this Request.

II. Digital Engagement Practices, Related Tools and Methods, and 
Regulatory Considerations and Potential Approaches

A. DEPS

    The Commission is issuing this Request, in part, to develop a 
better understanding of the market practices associated with firms' use 
of DEPs, which broadly include behavioral prompts, differential 
marketing, game-like features, and other design elements or features 
designed to engage retail investors. The Commission is aware of a 
variety of DEPs that may be used by firms, including the following: \2\
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    \2\ Broker-dealers' and investment advisers' use of DEPs and the 
related tools and methods must comply with existing rules and 
regulations. By identifying observed practices and soliciting 
comment on them, the Commission is not expressing a view as to the 
legality or conformity of such practices with the federal securities 
laws and the rules and regulations thereunder, nor with the rules of 
self-regulatory organizations (``SROs'').
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     Social Networking Tools. Digital platforms may be linked 
to internet content, enabling users to access social sentiment on the 
platform. Some digital platforms may embed social networking tools into 
their platforms, or enhance existing tools to allow an investor to 
create an on-line persona or avatar. Certain digital platforms enable 
investors to copy the trades of other investors (known as ``copy 
trading'') in certain types of investments.\3\
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    \3\ It is our understanding that copy trading is currently 
offered in certain investments, such as cryptocurrencies, in the 
U.S. and may be offered more broadly in other jurisdictions. Copy 
trading in securities may raise regulatory concerns under the U.S. 
federal securities laws, including potential broker-dealer and 
investment adviser status issues.
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     Games, Streaks and Other Contests with Prizes. Some 
digital platforms may employ games that use interactive graphics and 
offer prizes (e.g., slot-machine style interactive graphics, 
interactive wheels of fortune, or virtual ``scratch-off'' lottery 
tickets), for example, in connection with account opening. Some digital 
platforms may offer prizes to investors for completing certain ``to-do 
lists'' or tasks frequently within a specified time period (known as 
``streaks'') or for other types of contests (including performance-
based contests). Prizes may include free stock, cash, gaining access to 
additional features on the platforms, or a free trial period for a 
subscription to certain market data or levels of service. Tasks

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that may generate awards include referring others to the platform, 
engaging in community forums, linking a bank account, funding an 
account, trading, or promoting the app on social media.
     Points, Badges, and Leaderboards. Some digital platforms 
may use points or similar ``scorekeeping'' related to a specific area 
of activity. For example, some platforms offer ``paper trading'' (i.e., 
simulated trading) competitions that enable investors to practice 
trading without real money. Certain platforms also offer badges as 
visual markers of achievement as well as leaderboards to rank 
individuals based on performance-based criteria developed by the firm.
     Notifications. Some digital platforms may use 
notifications via email, text, or other means (e.g., push notifications 
on mobile devices). In some cases, investors can opt-in or opt-out of 
notifications; in others, notifications may be set by default with no 
ability to opt-out. Investors may receive notifications indicating a 
certain stock is up or down, noting a list of stocks qualifying as top 
``movers'' (i.e., largest percentage change in price), or reminding 
them that it has been a certain number of days since they last engaged 
in a trade. Notifications may also be used to attempt to reassure 
investors during periods of market volatility.
     Celebrations for Trading. Some digital platforms may have 
embedded animations and graphics, such as digital confetti or crowds 
applauding, that ``celebrate'' when investors enter orders to purchase 
stock or options.
     Visual Cues. Interface design elements may provide visual 
cues, including by displaying certain information more prominently than 
other information. In some cases, visual cues are targeted specifically 
to the investor. For example, some digital platforms' user interfaces 
shift the coloration of the entire screen between green and red based 
on an investor's portfolio performance. Some digital platforms present 
relevant news or other pieces of information to the user immediately 
once the portfolio turns negative.
     Ideas Presented at Order Placement and Other Curated Lists 
or Features. Some digital platforms may present ``ideas'' prior to 
allowing the investor to place an order. These ideas may involve 
curated lists or features, news headlines, etc.
     Subscriptions and Membership Tiers. Some firms may offer 
subscriptions or tiered memberships. Examples of additional features 
that may be provided include access to research reports, briefs, 
webcasts, and newspaper subscriptions; invitations to sports and 
industry events; credit line access; and an exemption or reduction of 
fees. In some cases, investors may be upgraded automatically based on 
balances and holdings reaching certain thresholds. Some firms may offer 
free subscription trials.
     Chatbots. Some digital platforms may offer chatbots, or 
computer programs that simulate live, human conversation. Chatbots may 
be offered to respond to investor inquiries relating to stock prices, 
account information, or customer service matters.
    DEPs may be designed to encourage account opening, account funding, 
and trading, or may be designed solely to increase investor engagement 
with investing apps, as there may be value in the number of investors 
interacting with the platform, how often they visit, and how long they 
stay.
    The use of DEPs carries both potential benefits and risks for 
retail investors. Simplified user interfaces and game-like features 
have been credited with making investment platforms more accessible to 
retail investors (in particular, younger retail investors),\4\ and 
assisting in the development and implementation of investor education 
tools. Others have noted that DEPs can encourage retail investors to 
increase their contributions to retirement accounts and to engage in 
other activities that are traditionally viewed as wealth-building 
exercises.\5\
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    \4\ See, e.g., Evie Liu, The Stock Market is Attracting New 
Investors. Here Are 3 Trends to Know., Barron's (Apr. 13, 2021), 
https://www.barrons.com/articles/the-stock-market-is-attracting-new-investors-here-are-3-trends-to-know-51618273799; Broadridge, 
Insights on the U.S. Investor (2020) (``Zero commission trades, 
mobile trading applications and the ability to acquire fractional 
shares are making it more attractive and easier for younger, lower 
asset investors to trade securities. This is bolstering Millennials' 
ability to participate more actively in equity investing.''); Maggie 
Fitzgerald, Now Teenagers Can Trade Stocks With Fidelity's New Youth 
Investing Accounts, CNBC (May 18, 2021), https://www.cnbc.com/2021/05/18/now-teenagers-can-trade-stocks-with-fidelitys-new-youth-investing-accounts.html?&qsearchterm=margin%20debits (``Of the 4.1 
million new accounts that Fidelity added in the first quarter of 
2021, 1.6 million were opened by retail investors 35 and younger, an 
increase of more than 222% from a year prior.''); Jennifer Sor, 
Young Investors Drive Increased Use of Investing Apps, Los Angeles 
Business Journal (Aug. 3, 2020), https://labusinessjournal.com/news/2020/aug/03/young-investors-drive-increased-use-investing-apps/.
    \5\ See, e.g., Chris Carosa, Are You Ready to Play the 401(k) 
Game? Hint: You Already Are, Forbes (Apr. 14, 2021), https://www.forbes.com/sites/chriscarosa/2021/04/14/are-you-ready-to-play-the-401k-game-hint-you-already-are/?sh=4d6e1b8674ab; Greg Iacurci, 
MassMutual Turns to Video Games to Boost Retirement Savings, 
Investment News (July 18, 2016), https://www.investmentnews.com/massmutual-turns-to-video-games-to-boost-retirement-savings-66476.
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    On the other hand, DEPs can potentially harm retail investors if 
they prompt them to engage in trading activities that may not be 
consistent with their investment goals or risk tolerance. Some have 
expressed concerns that DEPs encourage: (1) Frequent trading; \6\ (2) 
using trading strategies that carry additional risk (e.g., options 
trading and trading on margin); and (3) trading in complex securities 
products.\7\ DEPs also may employ what some researchers have called 
``dark patterns,'' described as user interface design choices that are 
knowingly designed to ``confuse users, make it

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difficult for users to express their actual preferences, or manipulate 
users into taking certain actions.'' \8\
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    \6\ Some have argued that certain compensation practices (such 
as payment for order flow or ``PFOF,'' in combination with zero 
commissions) create incentives for firms to use DEPs to encourage 
frequent trading, and that these incentives may not be transparent 
to retail investors. See, e.g., Game Stopped? Who Wins and Loses 
When Short Sellers, Social Media, and Retail Investors Collide, Part 
II: Hearing Before the H. Comm. on Fin. Servs., 113th Cong. (2021) 
(statement of Vicki L. Bogan, Associate Professor, Cornell 
University), https://docs.house.gov/meetings/BA/BA00/20210317/111355/HHRG-117-BA00-Wstate-BoganV-20210317.pdf. One form of PFOF is 
a practice wherein wholesale broker-dealers (often referred to as 
``principal trading firms'' or ``electronic market makers'') offer 
payment to retail broker-dealers in exchange for the right to trade 
principally with (or ``internalize'') their customer order flow. See 
17 CFR 10b-10(d)(8). Although PFOF is not prohibited, a broker-
dealer must not allow PFOF to interfere with its efforts to obtain 
best execution for its customers' transactions. See Payment for 
Order Flow, Securities Exchange Act of 1934 (``Exchange Act'') 
Release No. 34902 (Oct. 27, 1994) [59 FR 55006, at 55009 & n.28 
(Nov. 2, 1994)]; see also Robinhood Financial, LLC, Exchange Act 
Release No. 90694 (Dec. 17, 2020) (settled order) (the Commission 
brought an enforcement action against a broker-dealer for willfully 
violating Sections 17(a)(2) and 17(a)(3) of the Securities Act and 
Section 17(a) of the Exchange Act and Rule 17a-4 thereunder, for, 
among other things, failing to take appropriate steps to assess 
whether its higher PFOF rates were adversely affecting customer 
execution prices).
    \7\ In congressional hearings related to market events in 
January 2021, investor protection concerns were identified relating 
to the use of certain types of DEPs, including advertisements 
targeted towards specific groups of investors on digital platforms 
and game-like features on mobile apps. 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), https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=407107; Game Stopped? Who Wins and Loses 
When Short Sellers, Social Media, and Retail Investors Collide, Part 
II: Hearing Before the H. Comm. on Fin. Servs., 113th Cong. (2021), 
https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=406268; Game Stopped? Who Wins and Loses 
When Short Sellers, Social Media, and Retail Investors Collide, Part 
III: Hearing Before the H. Comm. on Fin. Servs., 113th Cong. (2021), 
https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=407748; Who Wins on Wall Street? GameStop, 
Robinhood, and the State of Retail Investing: Hearing Before the S. 
Comm. On Banking, Hous., & Urban Affairs, 113th Cong. (2021), 
https://www.banking.senate.gov/hearings/who-wins-on-wall-street-gamestop-robinhood-and-the-state-of-retail-investing.
    \8\ See Jamie Luguri and Lior Jacob Strahilevitz, Shining a 
Light on Dark Patterns, 13 Journal of Legal Analysis 43 (2021), 
https://academic.oup.com/jla/article/13/1/43/6180579.
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    In the questions below, the Commission's request for comment 
pertains to all DEPs on brokerage and advisory digital platforms, 
including, but not limited to, those identified above.
Industry Practices
    1.1 What types of DEPs do firms use (or in the future expect to 
use) on digital platforms and what are the intended purposes of each 
type of DEP used? For example, are particular DEPs designed to 
encourage or discourage particular investor actions or behaviors, such 
as opening of accounts, funding of accounts, trading, or increasing 
engagement with the app or platform? To what extent and how are firms 
using DEPs such as notifications (e.g., push notifications or text 
messages) or other design elements and features (e.g., design 
aesthetics in the user interface) as a means to alter (or nudge \9\) 
retail investor behavior or otherwise to encourage or discourage 
certain behaviors or activities? If so, what types of design elements 
are used and how are they used? Please explain any such specific design 
elements, how they intend to encourage specific retail investor 
behaviors, and whether and to what extent they are achieving their 
intended purposes.
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    \9\ Richard Thaler and Cass Sunstein define ``nudge'' as ``any 
aspect of the choice architecture that alters people's behavior in a 
predictable way without forbidding any options or significantly 
changing their economic incentives.'' See Richard H. Thaler and Cass 
R. Sunstein, Nudge: Improving Decisions About Health, Wealth, and 
Happiness 6 (Penguin Books 2009).
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    1.2 To what extent do firms that utilize DEPs provide retail 
investors the ability to opt in or out of interacting with those DEPs 
when using the firm's digital platform? To what extent, and how, are 
firms tailoring or personalizing DEPs to a particular retail investor?
    1.3 What types of firms use DEPs on their digital platforms, and on 
what types of platforms? Are these practices more prevalent among 
certain types of firms, or on certain types of platforms? How prevalent 
is the use of DEPs by broker-dealers? How prevalent is the use of DEPs 
by investment advisers? Which types of DEPs are most prevalent? For 
firms that have chosen not to use DEPs or certain DEPs, what are their 
reasons? Are firms that are not currently using DEPs considering 
adopting such features in the future?
    1.4 What market forces are driving the adoption of DEPs on digital 
platforms and how? For example, to what extent and how is the use of 
DEPs influenced or driven by market practices related to compensation 
and revenue (e.g., ``zero commission'' and PFOF)? What types of 
compensation and revenue arrangements influence or drive market 
practices related to the use of DEPs? Do such arrangements vary across 
product types and asset classes (e.g., options, other complex 
products)? How does the competition for new customers or clients or the 
retention of existing customers or clients drive firm adoption or use 
of DEPs?
    1.5 Are DEPs used to promote or otherwise direct retail investors 
to specific securities or certain types of securities, investment 
strategies, or services? If so, what types of securities, investment 
strategies, and services, what types of DEPs are used, and how are the 
DEPs used for these purposes? Do firms use DEPs to promote or otherwise 
direct retail investors to securities, investment strategies, or 
services that are more lucrative for the firm or that may be riskier to 
the retail investor than others--such as: margin services, options 
trading, proprietary products, products for which the firm receives 
revenue sharing or other third-party payments, or other higher fee 
products? Do firms use DEPs that are or can be tailored to the retail 
investor's investment profile and risk tolerance? If so, how? If not, 
why not?
    1.6 To what extent and how do firms monitor the use and proper 
functioning of DEPs? For example, to what extent and how do firms 
monitor notifications that retail investors receive or see from or on 
the firm's digital platforms?
    1.7 To what extent and how do firms use DEPs or alter their use of 
DEPs in response to changes in the market price volatility and trading 
volumes in securities, both for specific assets and the market as a 
whole? For example, to what extent and how do firms use DEPs to notify 
retail investors of market events? To what extent and how do firms use 
DEPs to notify retail investors of firm policies and procedures or 
other actions that may be taken by the firm, such as in response to 
market events (e.g., imposition of trading restrictions)? What type of 
DEPs are used, what information is communicated through DEPs in such 
circumstances, and what is the timing of such communications?
    1.8 Are firms seeking to use DEPs specifically to increase investor 
education? If so, how? What type of investor educational content is 
provided, how is that content chosen, and what types of DEPs are used? 
For example, are firms using DEPs to educate investors about the risks 
of certain activities, such as trading on margin or options trading? 
Are firms using DEPs to help investors understand how to make 
investment choices that are consistent with their investment 
objectives? If so, what types of DEPs are they using for these 
purposes, and how are they used? Have firms tested or otherwise 
observed the effectiveness of any such educational efforts at 
increasing retail investor knowledge and understanding of investing 
concepts including risks? Please explain and include any relevant data 
or information.
    1.9 Do firms use DEPs to encourage longer-term investment 
activities, including, but not limited to, increased contributions to 
or establishment of retirement accounts? If so, how?
    1.10 Do firms that utilize DEPs offer live, phone-based customer 
support or customer support through live, human-directed online support 
(i.e., online conversations that are not through an automated chatbot)? 
Does the availability of this type of support depend on the type of 
account or investments held (e.g., investors holding riskier products) 
or on account balances or asset thresholds? If firms offer live, phone-
based customer support or human-directed online support, what training 
do firms offer their customer support personnel, and what monitoring 
and quality assurance programs are used? How do firms interact with 
investors when the platform is unavailable--for example, when the firm 
has lost internet service or when the platform is undergoing 
maintenance? What alternative means of communication are available to 
investors during those times?
    1.11 To what extent and how do firms target certain specific groups 
of retail investors (including prospective customers or clients) 
through DEPs? What types of DEPs are used, and how are they targeted to 
specific retail investors or groups of retail investors? What factors 
do firms look to when deciding which groups of retail investors to 
target for each type of DEP?
    1.12 What feedback, positive or negative, or complaints do firms 
receive from retail investors relating to the use of DEPs?
Investor Characteristics and Practices
    1.13 What types of retail investors are customers or clients of 
firms that utilize DEPs? How does this customer or client base differ, 
if at all, from those firms that do not use such features--including as 
to age, prior investment experience, education, net worth, risk

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tolerance, liquidity needs, investment time horizon, and investment 
objectives? What types of retail investors engage most frequently with 
DEPs on platforms that use them? Do firms utilize DEPs for only certain 
types of customers or clients? If so, which ones and why? To what 
extent and how have DEPs enabled firms to reach, educate, and provide 
experience to first-time retail investors? To what extent and how have 
DEPs enabled retail investors to access specific investments or 
investment strategies more quickly and/or with less investing 
experience than under traditional methods? Please provide or identify 
any relevant data and other information.
    1.14 What trading or investment activities are retail investors 
engaging in through digital platforms that use DEPs? For retail 
investors who were investing prior to using digital platforms that use 
DEPs, how have their activities with respect to trading and investing 
changed since they started using such platforms and/or were first 
exposed to DEPs? For example, how often do retail investors engage in 
trading or investing through such platforms, how often did they engage 
in trading or investing prior to using such platforms, and how has such 
frequency changed as a result of using such platforms and/or being 
exposed to DEPs? How often do retail investors engage in other ways 
with such platforms (e.g., education, social features, and games)? How 
do retail investors learn of these platforms (e.g., news coverage, 
social media, internet search, paid advertisements)? Do firms collect 
data on how retail investors learn about or use the platforms, such as 
by asking as part of account opening? Please provide or identify any 
relevant data and other information.
    1.15 What customer and client trends have been observed in 
connection with or as a result of the adoption and implementation of 
DEPs? Specifically, is data available regarding changes in customer or 
client behavior, including in accounts opened, amount invested, 
frequency of deposits, order frequency, order size (including 
fractional shares), types of securities traded, the risk profiles of 
securities that are traded, use of margin, volume of customer 
complaints, and the adoption and use of new features on the firms' 
digital platforms? Is there data showing how, for customers with a 
similar investment profile, these changes compare with any changes in 
the behavior of customers or clients of firms that do not utilize DEPs? 
Is there data regarding numbers or percentages of new accounts opened 
by retail investors that received targeted communications from the firm 
as compared to new accounts opened by retail investors that had 
received no prior communications from the firm? Please provide or 
identify any relevant data and other information. What experience did 
retail investors have in the market prior to interacting with DEPs? 
What percentage of retail investors invested for the first time after 
interacting with a DEP? What role did DEPs play in their decision to 
begin investing?
Public Perspectives and Data
    1.16 What are the benefits associated with the use of DEPs from the 
perspective of firms, retail investors, and other interested parties? 
How do these benefits differ depending upon the type of feature used? 
Are there specific types of DEPs or specific uses of DEPs that have the 
potential to be particularly beneficial to retail investors? Are there 
significant investor protection benefits that arise from the use of 
DEPs generally or particular DEPs? Which particular DEPs and why? Are 
there ways in which DEPs are particularly successful at conveying 
information to retail investors in a way that they can process and 
implement effectively? Please provide or identify any relevant data and 
other information.
    1.17 What are the risks and costs associated with the use of DEPs 
from the perspective of firms, retail investors, and other interested 
parties? How do these risks or costs differ depending upon the type of 
feature used? Are there significant investor protection concerns that 
arise from the use of DEPs generally or particular DEPs? Are there 
particular DEPs that may pose unique risks or elevated investor 
protection concerns? Are there characteristics of particular DEPs that 
may encourage retail investors to engage in more frequent trading or 
invest in higher risk products or strategies? Please provide or 
identify any relevant data and other information.
    1.18 What experience do retail investors have with DEPs? Do retail 
investors believe that DEPs have caused a change in their investing 
behavior or type of investments? If so, how? Do retail investors feel 
like DEPs help or hurt their overall investment performance? Do retail 
investors believe DEPs have helped increase their understanding of 
securities markets and investing? If so, how? Do retail investors 
believe DEPs have made trading, investing, and monitoring their 
investments more or less accessible to them? Do retail investors 
believe DEPs have increased or decreased the benefits or risks of 
trading or investing in securities products? Do retail investors 
believe that they would have invested in the markets if only more 
traditional methods were available? Do retail investors believe that 
they would trade less frequently, invest in different products, or use 
different investment strategies if only more traditional methods were 
available?
    1.19 Do retail investors believe they are receiving investment 
advice or recommendations from DEPs or certain types of DEPs? If so, 
please explain. What types of DEPs do retail investors believe are most 
beneficial, and what types of features are most harmful, in meeting 
their own trading or investment objectives?
    1.20 For retail investors who have previously invested with the 
assistance of a financial professional, how do they believe their 
investing experience has changed as a result of interacting with a 
digital platform as opposed to a financial professional?
    1.21 How do commenters view the educational services currently 
provided by digital platforms? How could firms adopt or modify DEPs to 
facilitate and increase opportunities for investor education and 
encourage longer-term investment activities, including, but not limited 
to, through increased contributions to or establishment of retirement 
accounts?
    1.22 What similarities and differences exist between the 
functionality, and overall user experience, including with respect to 
DEPs, on a digital trading or investment platform versus similar 
practices on digital platforms in other contexts (e.g., shopping, 
fitness, entertainment)? Does a retail investor's experience with these 
types of features in other contexts affect the retail investor's 
trading or investment activity, and their engagement with the broker-
dealer or investment adviser's digital platform where DEPs are 
employed? Do commenters believe that certain types of DEPs are more, 
less, or as appropriate in the investing context than in other 
contexts? What types of features and why?
    1.23 Have researchers (including in the fields of behavioral 
finance, economics, psychology, marketing, and other related fields) 
studied the use of DEPs by broker-dealers and investment advisers? In 
particular, how have these practices been studied or observed to 
influence or reinforce the behavior of retail investors? To the extent 
retail investors have shifted from investing through human interaction 
(with a financial professional) to digital interaction (on a digital 
platform), how has that shift affected the behavior of retail 
investors? Please identify any relevant literature or data, including

[[Page 49072]]

research related to the use of similar practices in other fields that 
could assist the Commission in its consideration of these issues.
    1.24 Is there research in the fields of experimental psychology and 
marketing that contains evidence regarding the ability of DEPs to 
influence retail investors? Are there findings in those fields that 
suggest retail investors may not be fully aware that they have been 
influenced by a particular DEP?
    1.25 Do studies of gambling or addiction offer evidence regarding 
whether and to what extent the immediate positive feedback provided by 
certain DEPs may influence retail investor decision-making?
    1.26 How do commenters view the disclosures that firms are 
providing in connection with or specifically addressing the use of DEPs 
and the timing of such disclosures? In particular, how effective are 
disclosures at informing retail investors of any associated conflicts 
of interest presented by the use of DEPs and how DEPs could influence 
them and their trading and investing behavior? How accessible are these 
disclosures to retail investors engaging with DEPs? Please identify any 
relevant data or other information.

B. DEP-Related Tools and Methods

    In order to develop, test, and implement these practices, and 
thereafter to assess their effectiveness, firms may use numerous 
analytical and technological tools and methods.\10\ From a 
technological perspective, these tools and methods can employ 
predictive data analytics and AI/ML models--including deep learning, 
supervised learning, unsupervised learning, and reinforcement learning 
processes.\11\ These tools and methods can be designed to build and 
adapt DEPs based on observable investor activities. Such adaptations 
may be based on the AI/ML models' understanding of the neurological 
rewards systems of retail investors (obtained in the interactions 
between each retail investor and the firm's investment platform), and 
may be utilized to develop investor-specific changes to each retail 
investor's user experience.
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    \10\ In some cases, firms may rely on in-house and proprietary 
tools and methods to develop, test and implement DEPs, and in 
others, firms may use third-party service providers to assist in the 
DEP development process.
    \11\ See, e.g., Department of the Treasury et al., Request for 
Information and Comment on Financial Institutions' Use of Artificial 
Intelligence, Including Machine Learning (Feb. 2021) [86 FR 16837, 
16839-40 (Mar. 31, 2021)] (``Treasury RFI''); FINRA, Artificial 
Intelligence (AI) in the Securities Industry 5 (June 2020) (``FINRA 
AI Report''), https://www.finra.org/sites/default/files/2020-06/ai-report-061020.pdf; Financial Stability Board, Artificial 
Intelligence and Machine Learning in Financial Services: Market 
Developments and Financial Stability Implications (Nov. 1, 2017) 
(``FSB AI Report''), https://www.fsb.org/wp-content/uploads/P011117.pdf.
---------------------------------------------------------------------------

    Relatedly, firms that utilize AI/ML models may utilize model risk 
management to provide a governance framework for these models 
throughout their life cycle in order to account for AI/ML-specific 
risks. Technological tools and methods also include the use of natural 
language processing (``NLP'') and natural language generation 
(``NLG''). These specific uses of AI/ML may be employed to transform 
user interfaces and the interactions that retail investors have on 
digital platforms by developing an understanding of the investor's 
preferences and adapting the interface and related prompts to appeal to 
those preferences.\12\
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    \12\ See, e.g., FSB AI Report, supra note 11, at 14-15 (finding 
that chatbots are being introduced by a range of financial services 
firms, often in mobile apps or social media, and that chatbots are 
``increasingly moving toward giving advice and prompting customers 
to act'').
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    Beyond technological tools, firms may engage in various forms of 
research in order to help shape the DEPs developed and implemented on 
their platforms. This may include consultations with behavioral science 
professionals, and cross-industry research intended to identify those 
customer engagement practices used in other industries that have proven 
most effective.
Industry Practices
    2.1 To what extent, and how, do firms use (or in the future expect 
to use) tools based on AI/ML (including deep learning, supervised 
learning, unsupervised learning, and reinforcement learning) and NLP 
and NLG, to develop and evolve DEPs? What are the objective functions 
of AI/ML models (e.g. revenue generation)? What are the inputs relied 
on by those AI/ML models (e.g., visual cues or feedback)? Does the 
ability to collect individual-specific data impact the effectiveness of 
the ML model in maximizing its objective functions?
    2.2 To what extent, and how, do firms use (or in the future expect 
to use) behavioral psychology to develop and evolve platforms or DEPs? 
To what extent, and how, do firms use (or in the future expect to use) 
predictive data analytics to develop and evolve DEPs? To what extent, 
and how, do firms use ``dark patterns'' \13\ in connection with DEPs? 
To what extent do firms utilize these types of tools, analytics, and 
methods to modify DEPs over time, tailored to a specific retail 
investor's history on the platform? Which types of tools and methods 
are used for these and other purposes?
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    \13\ See supra note 8.
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    2.3 What types of research, information, data, and metrics are 
firms collecting, acquiring, and using in connection with the tools and 
methods identified above, or otherwise to design, implement, and modify 
DEPs and to assess their effectiveness? What are the sources for such 
information and data (e.g., proprietary research, user data, third-
party behavioral research, consultants, other service providers)? Does 
this research, information, data, and metrics, indicate whether DEPs 
affect trading frequency, volume, and results? If so, how?
    2.4 How are firms using cross-industry research and sources to 
design, implement, and modify DEPs? Specifically, how are firms using 
techniques employed, and lessons learned, within industries like retail 
shopping, video gaming, and video or music streaming services? What 
features originally adopted in other industries have been utilized and 
implemented by firms to increase user engagement? How has the use of 
such features impacted investor activity on digital platforms?
    2.5 To what extent, and how, do firms test or otherwise assess how 
their DEPs affect investor behavior and investing outcomes? What 
metrics are used for these assessments? What data and other results 
have such tests and assessments yielded? Have firms found that DEPs can 
be developed, evolved and implemented in order to affect retail 
investors' trading or investment behavior, either individually or as a 
group? Have firms found that those behaviors can be affected in a 
statistically significant way? If so, how? What controls do firms have 
in place to monitor the impact of DEPs on investor outcomes? How do 
firms incorporate any testing and monitoring into their policies and 
procedures?
    2.6 How do firms develop, test, deploy, monitor, and oversee the 
tools and methods they use, including any AI/ML models (including deep 
learning, supervised learning, unsupervised learning, and reinforcement 
learning), NLP, NLG, or other types of artificial intelligence? To what 
extent are these tools and methods proprietary to firms or offered by 
third parties? Do relationships with vendors result in conflicts of 
interest, and if so, what types of conflicts of interest? For example, 
are broker-dealers or investment advisers affiliated with these 
providers, or does compensation of the provider vary based upon 
investor activity? What formal governance

[[Page 49073]]

mechanisms do firms have in place for oversight of the vendors they use 
for these purposes? What model risk management steps do firms 
undertake? How do firms incorporate these practices and mechanisms into 
their policies and procedures?
    2.7 What type of data concerning retail investors is used to 
develop, evolve, implement, test and run DEPs? How is this data used? 
For example, are firms using data on how retail investors--individually 
and/or when grouped together--have engaged with their digital platform 
(including trading or investment activity) following exposure to DEPs? 
If so, how? Are firms tailoring or personalizing DEPs to individual 
retail investors or groups (or sub-groups) of retail investors? If so, 
how? Are firms collecting information about specific identifiers 
attributable to particular retail investors or groups (or sub-groups) 
of retail investors? If so, what types of specific identifiers are 
collected? Do firms use such identifiers (or others) in connection with 
determining the location of retail investors? If so, how do firms use 
location information? Do firms seek to cause any particular types of 
engagement with DEPs? If so, how? Are there other ways firms are using 
data concerning retail investors to develop, evolve, implement, test, 
and run DEPs?
    2.8 To what extent do firms purchase data from third-party vendors, 
including data concerning retail investors, to develop, evolve, 
implement, test, and run DEPs? How are firms utilizing data acquired 
from third-party vendors to develop, evolve, implement, test, and run 
DEPs? Are firms using data obtained from third-party vendors to tailor 
or personalize DEPs to individual retail investors? If so, how? To what 
extent do firms sell or otherwise share data about their own customers' 
or clients' behavior on their digital platforms, and who are the 
primary purchasers or recipients of that data?
    2.9 To the extent that firms use AI/ML to develop, evolve, 
implement, test, and run DEPs, are they ensuring that the AI/ML is 
explainable and reproducible? \14\ If so, how?
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    \14\ See, e.g., Treasury RFI, at 16839-40 (describing 
explainability as ``how an AI approach uses inputs to produce 
outputs'' and describing challenges associated with lack of 
explainability); see also FSB AI Report, at 2 (stating that the 
``lack of interpretability or `auditability' of AI and machine 
learning models could become a macro-level risk''); Gregory Barber, 
Artificial Intelligence Confronts a `Reproducibility' Crisis, Wired 
(Sept. 16, 2019), https://www.wired.com/story/artificial-intelligence-confronts-reproducibility-crisis/.
---------------------------------------------------------------------------

    2.10 Are there any particular challenges or risks that firms face 
in using AI/ML (including deep learning, supervised learning, 
unsupervised learning, and reinforcement learning), including AI 
developed or provided by third parties? If so, what are they and how do 
firms address such challenges or impediments and any risks associated 
with them? Have firms found that using AI/ML or retail investor data 
gathered in connection with DEPs raises unique issues related to 
financial privacy, information security, or identity theft prevention?
    2.11 To what extent and how do firms employ controls to identify 
and mitigate any biases or disparities that may be perpetuated by the 
use of AI/ML models \15\ in connection with the use of DEPs? For 
example, do firms evaluate the outputs of their AI/ML models to 
identify and mitigate biases that would raise investor protection 
concerns? Do firms utilize human oversight to identify biases that 
would raise investor protection concerns, in both the initial coding of 
AI/ML models and the resulting outputs of those models?
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    \15\ See e.g., Joy Buolamwini and Timnit Gebru, Gender Shades: 
Intersectional Accuracy Disparities in Commercial Gender 
Classification, 81 Proceedings of Machine Learning Research 77 
(2018), https://dam-prod.media.mit.edu/x/2018/02/06/Gender%20Shades%20Intersectional%20Accuracy%20Disparities.pdf; Ziad 
Obermeyer et al., Dissecting Racial Bias in an Algorithm Used to 
Manage the Health of Populations, 366 Science 6464, 447-453 (Oct. 
25, 2019), https://science.sciencemag.org/content/366/6464/447; 
Executive Office of the President of the United States, Big Data: A 
Report on Algorithmic Systems, Opportunity, and Civil Rights pp. 6-
10 (May 2016), https://obamawhitehouse.archives.gov/sites/default/files/microsites/ostp/2016_0504_data_discrimination.pdf.
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Public Perspectives and Data
    2.12 What are the benefits associated with the use of the tools and 
methods identified above (e.g., AI/ML, predictive data analytics, 
cross-industry research, behavioral science) in connection with the 
design, implementation, and modification of DEPs from the perspective 
of firms, retail investors, and other interested parties? How do these 
benefits differ depending upon the type of tools or methods? Do the 
tools and methods mitigate, or have the potential to mitigate, biases 
in the market that may have prevented participation by some retail 
investors (e.g., by lowering barriers to entry)? Please provide or 
identify any relevant data and other information.
    2.13 What are the risks and costs associated with the use of the 
tools and methods identified above (e.g., AI/ML, predictive data 
analytics, cross-industry research, behavioral science) in connection 
with the design, implementation, and modification of DEPs from the 
perspective of firms, retail investors, and other interested parties? 
How do these risks differ depending upon the type of tools or methods 
used? What are the most significant investor protection concerns 
arising from or associated with the use of such tools and methods by 
broker-dealers and investment advisers in the context of DEPs? Please 
provide or identify any relevant data and other information.
    2.14 What are the similarities and differences between the use of 
the types of tools and methods identified above in the context of DEPs 
versus other contexts? Do commenters believe that certain types of 
tools or methods are more, less, or as appropriate in the investing 
context than in other contexts? Please provide or identify any relevant 
data and other information.
    2.15 Are there any particular challenges or risks associated with 
the use of AI/ML (including deep learning, supervised learning, 
unsupervised learning, and reinforcement learning), including AI 
developed or provided by third parties? If so, what are they and how 
should firms address such challenges or impediments and any risks 
associated with them? What model risk management steps should firms 
undertake? Does the use of AI/ML or retail investor data gathered in 
connection with DEPs raise unique issues related to financial privacy, 
information security, or identity theft prevention?
    2.16 Have researchers (including in the fields of behavioral 
finance, economics, psychology, marketing, and other related fields) 
studied the use of such tools and methods in the context of the use of 
DEPs by firms, or in related contexts of individual decision-making? 
Please identify any relevant literature or data, including research 
related to the use of similar practices in other fields, that could 
assist the Commission in its consideration of these issues.
    2.17 To what extent can the use of the tools and methods identified 
above (e.g., AI/ML models) in connection with the use of DEPs 
perpetuate social biases and disparities? How, if at all, have 
commenters seen this in practice with regard to the development and use 
of DEPs on digital platforms (e.g., through marketing, asset 
allocation, fees)? Are there AI/ML models that are more or less likely 
to perpetuate such biases and disparities?

C. Regulatory Issues Associated With DEPS and the Related Tools and 
Methods and Potential Approaches

    Broker-dealers and investment advisers are currently subject to

[[Page 49074]]

extensive obligations under federal securities laws and regulations, 
and in the case of broker-dealers, rules of SROs (in particular, the 
Financial Industry Regulatory Authority, Inc. (``FINRA'') \16\) that 
are designed to promote conduct that, among other things, protects 
investors from abusive practices. Following is an overview of some of 
the existing statutory provisions, regulations, and rules that are 
particularly relevant to the use of DEPs and related tools and methods 
by broker-dealers and investment advisers.\17\
---------------------------------------------------------------------------

    \16\ Any person operating as a ``broker'' or ``dealer'' in the 
U.S. securities markets must register with the Commission, absent an 
exception or exemption. See Exchange Act section 15(a), 15 U.S.C. 
78o(a); see also Exchange Act sections 3(a)(4) and 3(a)(5), 15 
U.S.C. 78c(a)(4) and 78c(a)(5) (providing the definitions of 
``broker'' and ``dealer,'' respectively). Generally, all registered 
broker-dealers that deal with the public must become members of 
FINRA, a registered national securities association, and may choose 
to become exchange members. See Exchange Act section 15(b)(8), 15 
U.S.C. 78o(b)(8); 17 CFR 240.15b9-1. FINRA is the sole national 
securities association registered with the SEC under Section 15A of 
the Exchange Act. Because this Request is focused on broker-dealers 
that deal with the public and are FINRA member firms, we refer to 
FINRA rules as broadly applying to ``broker-dealers,'' rather than 
to ``FINRA member firms.''
    \17\ Broker-dealers and investment advisers are subject to a 
host of other obligations that are not summarized in this overview, 
and that may also be relevant to the use of DEPs and related tools 
and methods. For example, additional regulatory obligations on 
broker-dealers include those relating to: Registration; certain 
prohibited or restricted conflicts of interest; fair prices, 
commissions and charges; and best execution. As another example, 
additional regulatory obligations on investment advisers include 
those relating to registration; certain prohibited transactions; and 
written codes of ethics.
---------------------------------------------------------------------------

    In addition to these specific obligations, federal securities laws 
and regulations broadly prohibit fraud by broker-dealers and investment 
advisers as well as fraud by any person in the offer, purchase, or sale 
of securities, or in connection with the purchase or sale of 
securities. Generally, these anti-fraud provisions cover manipulative 
or deceptive conduct, including an affirmative misstatement or the 
omission of a material fact that a reasonable investor would view as 
significantly altering the total mix of information made available.\18\
---------------------------------------------------------------------------

    \18\ See Securities Act section 17(a), 15 U.S.C. 77q(a); 
Exchange Act section 10(b), 15 U.S.C. 78j(b); Exchange Act section 
15(c), 15 U.S.C. 78o(c); Investment Advisers Act of 1940 (``Advisers 
Act'') section 206, 15 U.S.C. 80b-6; see also Exchange Act section 
9(a), 15 U.S.C. 78i(a); see also Basic v. Levinson, 485 U.S. 224, 
239 n.17 (1988).
---------------------------------------------------------------------------

1. Existing Broker-Dealer Obligations \19\
---------------------------------------------------------------------------

    \19\ These obligations cannot be waived or contracted away by 
customers. See Exchange Act section 29(a), 15 U.S.C. 78cc(a) (``Any 
condition, stipulation, or provision binding any person to waive 
compliance with any provision of [the Exchange Act] or any rule or 
regulation thereunder, or any rule of a [SRO], shall be void.'').
---------------------------------------------------------------------------

    Under the anti-fraud provisions of the federal securities laws and 
SRO rules, broker-dealers are required to deal fairly with their 
customers and observe high standards of commercial honor and just and 
equitable principles of trade.\20\ A number of more specific 
obligations are summarized below:
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    \20\ See, e.g., Duker & Duker, Exchange Act Release No. 2350, 6 
SEC. 386, 388 (Dec. 19, 1939) (Commission opinion) (``Inherent in 
the relationship between a dealer and his customer is the vital 
representation that the customer be dealt with fairly, and in 
accordance with the standards of the profession.''); see also U.S. 
Securities and Exchange Commission, Report of the Special Study of 
Securities Markets of the Securities and Exchange Commission, H.R. 
Doc. No. 95, at 238 (1st Sess. 1963) (``An obligation of fair 
dealing, based upon the general antifraud provisions of the Federal 
securities laws, rests upon the theory that even a dealer at arm's 
length impliedly represents when he hangs out his shingle that he 
will deal fairly with the public.''); FINRA Rule 2010 (Standards of 
Commercial Honor and Principles of Trade); NASD Interpretive 
Material 2310-2 (Fair Dealing with Customers) (``Implicit in all 
member and registered representative relationships with customers 
and others is the fundamental responsibility for fair dealing. Sales 
efforts must therefore be undertaken only on a basis that can be 
judged as being within the ethical standards of [FINRA's] Rules, 
with particular emphasis on the requirement to deal fairly with the 
public.'').
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     Account Opening and Other Approval Obligations. Broker-
dealers must obtain certain information about their customers at 
account opening, under anti-money laundering (``AML'') and know your 
customer requirements,\21\ and are required to maintain customer 
account information, including whether a customer is of legal age.\22\
---------------------------------------------------------------------------

    \21\ Financial institutions, including broker-dealers, are 
required to establish written customer identification programs 
(CIP), which must include, at a minimum, procedures for: Obtaining 
customer identifying information from each customer prior to account 
opening; verifying the identity of each customer, to the extent 
reasonable and practicable, within a reasonable time before or after 
account opening; making and maintaining a record of information 
obtained relating to identity verification; determining within a 
reasonable time after account opening or earlier whether a customer 
appears on any list of known or suspected terrorist organizations 
designated by Treasury; and providing each customer with adequate 
notice, prior to opening an account, that information is being 
requested to verify the customer's identity. See 31 CFR 1023.220 
(Customer Identification Program for Broker-Dealers). As part of 
broker-dealers' AML compliance programs, they must include risk-
based procedures for conducting ongoing customer due diligence, to 
comply with the Customer Due Diligence Requirements for Financial 
Institutions (``CDD Rule'') of the Financial Crimes Enforcement 
Network (FinCEN). See FINRA Rule 3310 (Anti-Money Laundering 
Compliance Program); 81 FR 29398 (May 11, 2016) (CDD Rule Release); 
82 FR 45182 (Sept. 28, 2017) (correction to CDD Rule amendments). 
Additionally, pursuant to FINRA Rule 2090 (Know Your Customer), all 
member broker-dealers must use reasonable diligence, at both the 
opening of a customer account, and for the duration of the customer 
relationship to know and retain the ``essential facts'' concerning 
each customer. Such ``essential facts'' include those that are 
necessary ``to (a) effectively service the customer's account, (b) 
act in accordance with any special handling instructions for the 
account, (c) understand the authority of each person acting on 
behalf of the customer, and (d) comply with applicable laws, 
regulations, and rules.'' See FINRA Regulatory Notice 11-02 (SEC 
Approves Consolidated FINRA Rules Governing Know-Your-Customer and 
Suitability Obligations); see also 17 CFR 240.17a-3(a)(17).
    \22\ See FINRA Rule 4512 (Customer Account Information). As a 
general matter, whether any particular individual is able to enter 
into a contract (such as that associated with opening a brokerage 
account) is a matter of state law, and not explicitly governed by 
the federal securities laws. See also 17 CFR 240.17a-3(a)(17).
---------------------------------------------------------------------------

    Additional obligations apply for investors to transact in certain 
types of securities (e.g., options) or obtain certain services (e.g., 
margin).\23\ For example, broker-dealers must pre-approve a customer's 
account to trade options on securities.\24\ Prior to approving a 
customer's account for options trading, the broker-dealer must seek to 
obtain ``essential facts relative to the customer, [their] financial 
situation and investment objectives.'' \25\ Broker-dealers must then 
verify the background and financial information they obtain regarding 
each customer, and obtain an executed written agreement from the 
customer agreeing, among other things, to be bound by all applicable 
FINRA rules applicable to the trading of option contracts.\26\
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    \23\ Approval obligations also apply for investors to engage in 
day-trading. See FINRA Rule 2130 (Approval Procedures for Day-
Trading Accounts).
    \24\ See FINRA Rule 2360(b)(16) (Options). FINRA has also 
extended the options account approval requirements of Rule 
2360(b)(16), by reference, to customers seeking to place orders to 
buy or sell warrants. See FINRA Rule 2352 (Account Approval). 
Numerous exchanges that facilitate options trading apply similar 
standards for customer pre-approval before accepting orders for 
options contracts on the exchange.
    \25\ See FINRA Rule 2360(b)(16)(B).
    \26\ See FINRA Rule 2360(b)(16)(C) and (D). FINRA has also 
indicated that in the case of options, broker-dealers should 
consider whether they should provide limited account approval to a 
customer, based on this information. For example, customers may be 
approved to make purchases of puts and calls only, be restricted to 
covered call writing, or be approved to engage in uncovered put and 
call writing. See FINRA Regulatory Notice 21-15 (FINRA Reminds 
Members About Options Account Approval, Supervision and Margin 
Requirements).
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    With respect to margin, broker-dealers are required to obtain the 
signature of the account owner with respect to a margin account \27\ 
and to obtain a customer's written consent.\28\ These written consents 
and signatures are

[[Page 49075]]

generally obtained by broker-dealers when a customer executes a margin 
agreement.\29\
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    \27\ See 17 CFR 240.17a-3(a)(9).
    \28\ The written consent is a condition necessary for the 
broker-dealer to be able to hypothecate (i.e., pledge) securities 
under circumstances that would permit the commingling of customers' 
securities. Broker-dealers are also required to give written notice 
to a pledgee that, among other things, a security pledged is carried 
for the account of a customer. See 17 CFR 240.8c-1 and 240.15c2-1.
    \29\ See 17 CFR 240.8c-1, 240.15c2-1, and 240.17a-3(a)(9). 
Margin agreements also typically state that a customer must abide by 
the margin requirements established by the Federal Reserve Board, 
SROs such as FINRA, any applicable securities exchange, and the firm 
where the margin account is established. See also FINRA Rule 
4210(f)(8)(B) (Margin Requirements) regarding special margin 
requirements for day trading, including special requirements for 
``pattern day traders'' (any customer who executes four or more day 
trades within five business days, provided that the number of day 
trades represents more than six percent of the customer's total 
trades in the margin account for that same five business day 
period).
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     Standard of Conduct. Regulation Best Interest (``Reg BI'') 
requires broker-dealers that make recommendations of securities 
transactions or investment strategies involving securities (including 
account recommendations) to retail customers to act in their best 
interest, and not place the broker-dealer's interests ahead of the 
retail customer's interest.\30\ 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.\31\ Broker-dealers satisfy their obligations under Reg BI by 
complying with four specified component obligations: A disclosure 
obligation; \32\ a care obligation; \33\ a conflict of interest 
obligation; \34\ and a compliance obligation.\35\ Additional 
suitability obligations are imposed on broker-dealers when recommending 
transactions in certain types of securities, such as options, to any 
customer.\36\
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    \30\ 17 CFR 240.15l-1; Regulation Best Interest: The Broker-
Dealer Standard of Conduct, Exchange Act Release No. 34-86031 [84 FR 
33318 (July 12, 2019)] (``Reg BI Adopting Release''). Following the 
adoption of Reg BI, which, among other things, incorporated and 
enhanced the principles found in FINRA's suitability rule (Rule 
2111), FINRA amended Rule 2111 to, among other things, state that 
the rule does not apply to recommendations subject to Reg BI. See 
Exchange Act Release No. 89091 (June 18, 2020) [85 FR 37970 (June 
24, 2020)].
    \31\ Reg BI Adopting Release, supra note 30, at 33337. The 
determination of whether a recommendation has been made turns on the 
facts and circumstances of a particular situation. Id. at 33335 
(``Factors considered in determining whether a recommendation has 
taken place include whether a communication `reasonably could be 
viewed as a ``call to action'' ' and `reasonably would influence an 
investor to trade a particular security or group of securities.' The 
more individually tailored the communication to a specific customer 
or a targeted group of customers about a security or group of 
securities, the greater the likelihood that the communication may be 
viewed as a `recommendation.' '') (citation omitted); see also NASD 
Notice to Members 01-23 (Apr. 2001) (Online Suitability--Suitability 
Rules and Online Communications) (providing examples of electronic 
communications that are considered to be either within or outside 
the definition of ``recommendation''). To the extent that a broker-
dealer makes a recommendation, as that term is interpreted by the 
Commission under Reg BI, to a retail customer through or in 
connection with a DEP, Reg BI would apply to the recommendation.
    \32\ The disclosure obligation requires the broker-dealer to 
provide certain required disclosure before or at the time of the 
recommendation, about the recommendation and the relationship 
between the broker-dealer and the retail customer. 17 CFR 240.15l-
1(a)(2)(i).
    \33\ The care obligation requires the broker-dealer to exercise 
reasonable diligence, care, and skill in making the recommendation. 
17 CFR 240.15l-1(1)(a)(2)(ii).
    \34\ The conflict of interest obligation requires the broker-
dealer to establish, maintain, and enforce written policies and 
procedures reasonably designed to address conflicts of interest 
associated with its recommendations to retail customers. Among other 
specific requirements, broker-dealers must identify and disclose any 
material limitations, such as a limited product menu or offering 
only proprietary products, placed on the securities or investment 
strategies involving securities that may be recommended to a retail 
customer and any conflicts of interest associated with such 
limitations, and prevent such limitations and associated conflicts 
of interest from causing the broker-dealer or the associated person 
to place the interest of the broker-dealer or the associated person 
ahead of the retail customer's interest. 17 CFR 240.15l-
1(a)(2)(iii).
    \35\ The compliance obligation requires the broker-dealer to 
establish, maintain, and enforce written policies and procedures 
reasonably designed to achieve compliance with Reg BI. 17 CFR 
240.15l-1(a)(2)(iv).
    \36\ See, e.g., FINRA Rule 2360(b)(19).
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     Disclosure Obligations. Broker-dealers are subject to a 
number of customer disclosure obligations, including disclosures at the 
inception of the customer relationship,\37\ disclosures that must be 
made in conjunction with recommendations of securities transactions or 
investment strategies involving securities,\38\ and certain product- or 
activity-specific disclosures pertaining to among others, options, 
margin, and day trading.\39\ Additionally, broker-dealers are liable 
under the anti-fraud provisions for failing to disclose material 
information to their customers when they have a duty to make such 
disclosure.\40\ Broker-dealers are also required to make disclosures to 
customers of their order execution and routing practices.\41\
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    \37\ Disclosure obligations include Form CRS relationship 
summary (describing the broker-dealer's services, fees, costs, 
conflicts of interest and disciplinary history). See 17 CFR 240.17a-
14.
    \38\ See 17 CFR 240.15l-1 (Reg BI).
    \39\ See, e.g., FINRA Rule 2360(b)(16)(A) (requiring broker-
dealers to provide certain risk disclosures when approving customers 
for options transactions); FINRA Rule 2264 (Margin Disclosure 
Statement) (specifying disclosures in advance of opening a margin 
account for a non-institutional customer); 17 CFR 240.10b-16 
(requiring disclosures of all credit terms in connection with any 
margin transactions at account opening); FINRA Rule 2270 (Day-
Trading Risk Disclosure Statement) (requiring that a disclosure 
statement be provided to any non-institutional customer that opens 
an account at a broker-dealer that promotes a day-trading strategy).
    \40\ See Basic v. Levinson, supra note 18. Generally, under the 
anti-fraud provisions, a broker-dealer's duty to disclose material 
information to its customer is based upon the scope of the 
relationship with the customer, which depends on the relevant facts 
and circumstances. See, e.g., Conway v. Icahn & Co., Inc., 16 F.3d 
504, 510 (2d Cir. 1994) (``A broker, as agent, has a duty to use 
reasonable efforts to give its principal information relevant to the 
affairs that have been entrusted to it.'').
    \41\ See generally 17 CFR 242.605 and 242.606 (Regulation NMS 
Rules 605 and 606). For example, under NMS Rule 606, broker-dealers 
must provide public reports concerning the venues to which they 
route customer orders for execution and discuss material aspects of 
their arrangements with these execution venues, including PFOF that 
broker-dealers receive from the venues. Pursuant to amendments 
implemented in 2020, these reports require enhanced specificity 
concerning PFOF and other types of practices that may present 
broker-dealer conflicts of interest. See Exchange Act Release No. 
78309 (Nov. 2, 2018) [83 FR 58338, 58373-6 (Nov. 19, 2018)].
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     Reporting and Other Financial Responsibility Requirements. 
Broker-dealers are subject to comprehensive financial responsibility 
rules, including reporting requirements under Exchange Act Rule 17a-5, 
minimum net capital requirements under Exchange Act Rule 15c3-1, and 
customer protection requirements under Exchange Act Rule 15c3-3.\42\ 
Broker-dealers are also subject to various rules relating to margin, 
including, for example, disclosure and other requirements when 
extending or arranging credit in certain transactions,\43\ disclosure 
of credit terms in margin transactions,\44\ a description of the margin 
requirements that determine the amount of collateral

[[Page 49076]]

customers are expected to maintain in their margin accounts,\45\ and a 
requirement to issue a margin disclosure statement prior to opening a 
margin account.\46\
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    \42\ Rule 17a-5 has two main elements: (1) A requirement that 
broker-dealers file periodic unaudited reports about their financial 
and operational condition using the FOCUS Report form; and (2) a 
requirement that broker-dealers annually file financial statements 
and certain reports, as well as reports covering those statements 
and reports prepared by an independent public accountant registered 
with the Public Company Accounting Oversight Board (``PCAOB'') in 
accordance with PCAOB standards. 17 CFR 240.17a-5. The objective of 
Rule 15c3-1 is to require a broker-dealer to maintain sufficient 
liquid assets to meet all liabilities, including obligations to 
customers, counterparties, and other creditors and to have adequate 
additional resources to wind-down its business in an orderly manner 
without the need for a formal proceeding if the firm fails 
financially. See 17 CFR 240.15c3-1. Rule 15c3-3 requires a carrying 
broker-dealer to maintain physical possession or control over 
customers' fully paid and excess margin securities. The rule also 
requires a carrying broker-dealer to maintain a reserve of funds or 
qualified securities in an account at a bank that is at least equal 
in value to the net cash owed to customers. 17 CFR 240.15c3-3.
    \43\ See 17 CFR 240.15c2-5 (Disclosure and other requirements 
when extending or arranging credit in certain transactions).
    \44\ See 17 CFR 240.10b-16 (Disclosure of credit terms in margin 
transactions).
    \45\ See FINRA Rule 4210 (Margin Requirements). See also 12 CFR 
220.1 et seq. (Federal Reserve Board's Regulation T regulating, 
among other things, extensions of credit by brokers and dealers);
    \46\ See FINRA Rule 2264 (Margin Disclosure Statement). See also 
FINRA Regulatory Notice 21-15 (FINRA Reminds Members About Options 
Account Approval, Supervision and Margin Requirements).
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     Communications with the Public Rules. Broker-dealers are 
subject to a number of rules governing communications with the public, 
including advertising or marketing communications. These rules apply to 
broker-dealers' written (including electronic) communications with the 
public and are subject to obligations pertaining to content, 
supervision, filing, and recordkeeping.\47\ All communications must be 
based on principles of fair dealing and good faith, be fair and 
balanced, and comply with a number of other content standards.\48\ 
Through its filings review program, FINRA's Advertising Regulation 
Department reviews communications submitted either voluntarily or as 
required by FINRA rules.\49\ In the case of communications relating to 
options, broker-dealers are subject to certain heightened 
obligations.\50\
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    \47\ See, e.g., FINRA Rule 2210 (Communications with the 
Public). FINRA has provided guidance regarding the applicability of 
the communications rules in the context of social media and digital 
communications. See FINRA Regulatory Notice 19-31 (Disclosure 
Innovations in Advertising and Other Communications with the 
Public); FINRA Regulatory Notice 17-18 (Social Media and Digital 
Communications); FINRA Regulatory Notice 11-39 (Social Media 
websites and the Use of Personal Devices for Business 
Communications); FINRA Regulatory Notice 10-06 (Social Media 
websites); see also 17 CFR 240.17a-4(b)(4). Paragraph (b)(4) of Rule 
17a-4 requires a broker-dealer to preserve originals of all 
communications received and copies of all communications sent (and 
any approvals thereof) by the broker-dealer (including inter-office 
memoranda and communications) relating to its business as such, 
including all communications which are subject to the rules of an 
SRO of which the broker-dealer is a member regarding communications 
with the public. The term ``communications,'' as used in paragraph 
(b)(4) of Rule 17a-4, includes all electronic communications (e.g., 
emails and instant messages). See Recordkeeping and Reporting 
Requirements for Security-Based Swap Dealers, Major Security-Based 
Swap Participants, and Broker-Dealers, Exchange Act Release No. 
87005 (Sept. 19, 2019) [84 FR 68550, 68563-64 (Dec. 16, 2019)].
    \48\ Among other requirements and prohibitions, firms may not 
``make any false, exaggerated, unwarranted, promissory or misleading 
statement or claim in any communication;'' firms ``must ensure that 
statements are clear and not misleading within the context in which 
they are made, and that they provide balanced treatment of risks and 
potential benefits;'' and firms ``must consider the nature of the 
audience to which the communication will be directed and must 
provide details and explanations appropriate to the audience.'' See 
FINRA Rule 2210 (Communications with the Public).
    \49\ FINRA reviews communications for compliance with applicable 
regulations. Broker-dealers must submit certain retail 
communications to FINRA for its approval at least ten business days 
prior to first use or publication. In addition to reviewing filed 
communications, broker-dealer communications can also be subject to 
spot-check reviews by FINRA. See FINRA Rule 2210(c).
    \50\ See FINRA Rule 2220 (Options Communications). For example, 
when making retail communications concerning the sale of options 
products, broker-dealers must submit certain of those communications 
to FINRA for its approval at least ten calendar days prior to use.
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     Supervision Obligations and Insider Trading Procedures. 
Broker-dealers must ``establish and maintain a system to supervise the 
activities of each associated person that is reasonably designed to 
achieve compliance with applicable securities laws and regulations, and 
with applicable FINRA rules.'' \51\ Among other things, broker-dealers 
must establish, maintain, and enforce written procedures to supervise 
the types of business in which they engage and the activities of their 
associated persons that are reasonably designed to achieve compliance 
with applicable securities laws and regulations, and with applicable 
FINRA rules.\52\ Broker-dealers must also establish, maintain, and 
enforce written policies and procedures reasonably designed to prevent 
the misuse of material, nonpublic information by the broker-dealer or 
its associated persons.\53\
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    \51\ See FINRA Rule 3110 (Supervision). Under Exchange Act 
Sections 15(b)(4)(E) and 15(b)(6), the Commission institutes 
administrative proceedings against broker-dealers and supervisors 
for failing reasonably to supervise, with a view to preventing 
violations of the federal securities laws. 15 U.S.C. 78o(b)(4)(E) 
and 78o(b)(6).
    \52\ See FINRA Rule 3110(b)(1).
    \53\ See Exchange Act section 15(g), 15 U.S.C. 78o(g).
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     Recordkeeping Obligations. Section 17(a) of the Exchange 
Act provides the Commission with authority to issue rules requiring 
broker-dealers to make and keep for prescribed periods such records as 
the Commission, by rule, prescribes as necessary or appropriate in the 
public interest, for the protection of investors, or otherwise in 
furtherance of the purposes of the Exchange Act. Rules 17a-3 and 17a-4 
prescribe the primary recordkeeping requirements for broker-
dealers.\54\
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    \54\ Exchange Act Rule 17a-3 (delineating certain records that 
broker-dealers must make and keep current, including customer 
account records, copies of customer confirmations, records of 
customer complaints, and records related to every recommendation of 
any securities transaction or investment strategy involving 
securities made to a retail customer); Exchange Act Rule 17a-4 
(specifying the time period and manner in which records made 
pursuant to Rule 17a-3 must be preserved, and identifying additional 
records that must be maintained for prescribed time periods.). See 
17 CFR 240.17a-3 and 240.17a-4.
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     Customer Complaints. Broker-dealers are required to have 
procedures to document and capture, acknowledge, and respond to all 
written (including electronic) customer complaints,\55\ and report to 
FINRA certain specified events related to customer complaints, as well 
as statistical and summary information on customer complaints.\56\ 
Broker-dealers must also make and keep a record indicating that each 
customer has been provided with a notice with the address and telephone 
number to which complaints may be directed.\57\
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    \55\ See FINRA Rule 3110(b)(5).
    \56\ See FINRA Rule 4530; see also FINRA Rule 4311(g) 
(addressing certain requirements for carrying agreements relating to 
customer complaints).
    \57\ See 17 CFR 240.17a-3(a)(18) (requiring broker-dealers to 
make and maintain a record for each written customer complaint 
received regarding an associated person, including the disposition 
of the complaint).
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     Privacy and Cybersecurity. Regulation S-P requires broker-
dealers to disclose certain information about their privacy policies 
and practices, limits the instances in which broker-dealers may 
disclose nonpublic personal information about consumers to 
nonaffiliated third parties without first allowing the consumer to opt 
out, and requires broker-dealers to adopt written policies and 
procedures that address administrative, technical, and physical 
safeguards for the protection of customer records and information.\58\ 
Regulation S-P also limits the re-disclosure and re-use of nonpublic 
personal information, and it limits the sharing of account number 
information with nonaffiliated third parties for use in telemarketing, 
direct mail marketing, and email marketing.\59\ Broker-dealers are also 
required, under Regulation S-ID, to develop and implement a written 
identity theft prevention program designed to detect, prevent, and 
mitigate identity theft in connection with certain existing accounts or 
the opening of new accounts.\60\
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    \58\ See 17 CFR 248. Regulation S-P implements the consumer 
financial privacy provisions, as well as the customer records and 
information security provisions, of Title V of the Gramm Leach 
Bliley Act (``GLBA''). It also implements the consumer report 
information disposal provisions (Section 628) of the Fair Credit 
Reporting Act (``FCRA'') as amended by the Fair and Accurate Credit 
Transactions Act of 2003 (``FACT Act'').
    \59\ See 17 CFR 248.11 and 248.12.
    \60\ See 17 CFR 248.201. Regulation S-ID implements the identity 
theft red flags rules and guidelines provisions (Section 615(e)) of 
the FCRA as amended by the Dodd-Frank Wall Street Reform and 
Consumer Protection Act of 2010 (``Dodd-Frank Act'').

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[[Page 49077]]

2. Existing Investment Adviser Obligations
    The Investment Advisers Act of 1940 (``Advisers Act'') establishes 
a federal fiduciary duty for investment advisers, whether or not 
registered with the Commission, which is made enforceable by the anti-
fraud provisions of the Advisers Act. The fiduciary duty is broad and 
applies to the entire adviser-client relationship, and must be viewed 
in the context of the agreed-upon scope of that relationship.\61\ As a 
fiduciary, an investment adviser owes its clients a duty of care and a 
duty of loyalty.\62\ Under its duty of loyalty, an adviser must make 
full and fair disclosure of all material facts relating to the advisory 
relationship and must eliminate or make full and fair disclosure of all 
conflicts of interest which might incline an investment adviser--
consciously or unconsciously--to render advice which is not 
disinterested such that a client can provide informed consent to the 
conflict. An adviser's duty of care includes, among other things: (i) A 
duty to provide investment advice that is in the best interest of the 
client, based on a reasonable understanding of the client's objectives; 
\63\ (ii) a duty to seek best execution of a client's transactions 
where the adviser has the responsibility to select broker-dealers to 
execute client trades (typically in the case of discretionary 
accounts); and (iii) a duty to provide advice and monitoring at a 
frequency that is in the best interest of the client, taking into 
account the scope of the agreed relationship.\64\ We discussed the 
fiduciary duty and these aspects of it in greater detail in a 
Commission interpretation.\65\
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    \61\ For example, to the extent that an adviser provides 
investment advice to a client through or in connection with a DEP, 
then all such investment advice must be consistent with the 
adviser's fiduciary duty.
    \62\ This fiduciary duty ``requires an adviser to adopt the 
principal's goals, objectives, or ends.'' See Commission 
Interpretation Regarding Standard of Conduct for Investment 
Advisers, Advisers Act Release No. 5248 (June 5, 2019) [84 FR 33669, 
33671 (July 12, 2019)] (``IA Fiduciary Duty Interpretation'') 
(internal quotations omitted). This means the adviser must, at all 
times, serve the best interest of its client and not subordinate its 
client's interest to its own. See id.
    \63\ In order to provide such advice, an investment adviser must 
have a reasonable understanding of the client's objectives. See id. 
at 33672-3.
    \64\ See id. at 33669-78.
    \65\ See id.
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    Rules adopted under the Advisers Act also impose various 
obligations on registered investment advisers (or investment advisers 
required to be registered with the Commission), including:
     Disclosure Requirements. Registered investment advisers 
are subject to a number of client disclosure obligations, including 
disclosures before or at the time of entering into an advisory 
contract, annually thereafter, and when certain changes occur. These 
disclosures include information about a number of topics, including an 
adviser's business practices, fees, conflicts of interest, and 
disciplinary information, and about advisory employees and their other 
business activities.\66\
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    \66\ See, e.g., 17 CFR 275.204-3 (requiring an adviser to 
deliver a Form ADV Part 2A brochure to advisory clients); 17 CFR 
275.204-5 (requiring an adviser to deliver Form CRS to each retail 
investor).
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     Reporting Requirements. Investment advisers register with 
the Commission by filing Form ADV and are required to file periodic 
updates.\67\ Like all market participants, investment advisers are 
subject to reporting obligations under the Exchange Act under specified 
circumstances,\68\ as well as trading rules and restrictions under the 
Exchange Act.\69\
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    \67\ See, e.g., 17 CFR 275.204-1.
    \68\ These include, for example, Schedule 13D or Schedule 13G 
reporting of ``beneficial ownership'' of more than 5 percent of 
shares of a voting class of a security registered under Section 12 
of the Exchange Act and Form 13F quarterly reports filed by 
institutional investment managers that manage more than $100 million 
of specified securities. See 17 CFR 240.13d-1(a)-(c) and 240.13f-1.
    \69\ These include prohibitions and restrictions on market 
manipulation and insider trading. See, e.g., 17 CFR 240.10b5-1 and 
240.10b5-2.
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     Marketing Requirements. Rule 206(4)-1, as amended in 
December 2020, governs investment advisers' marketing practices.\70\ 
This rule contains seven general prohibitions on the types of activity 
that could be false or misleading that apply to all advertisements. The 
rule also prohibits advertisements that contain testimonials, 
endorsements, third-party ratings, and performance information, unless 
certain conditions are met.
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    \70\ The compliance date for amended rule 206(4)-1 under the 
Advisers Act is November 4, 2022. Until then, advisers that do not 
comply with amended 206(4)-1 must comply with existing rule 206(4)-
1, which governs adviser's advertisements, and rule 206(4)-3, which 
governs cash payments for client solicitations.
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     Compliance Programs. Under rule 206(4)-7, an investment 
adviser must adopt and implement written policies and procedures 
reasonably designed to prevent violation of the Advisers Act and the 
rules thereunder by the firm and its supervised persons.\71\ Among 
other things, an adviser's compliance policies and procedures should 
address portfolio management processes, including allocation of 
investment opportunities among clients and consistency of portfolios 
with clients' investment objectives, disclosures by the adviser, and 
applicable regulatory restrictions. This rule requires review of such 
policies and procedures at least annually, and the designation of a 
chief compliance officer responsible for administering such policies 
and procedures.
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    \71\ See 17 CFR 275.206(4)-7.
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     Supervision Obligations and Insider Trading Procedures. 
Investment advisers have a duty to reasonably supervise certain persons 
with respect to activities performed on the adviser's behalf.\72\ In 
addition, section 204A of the Advisers Act requires investment advisers 
(registered with the Commission or not) to establish, maintain, and 
enforce written policies and procedures reasonably designed to prevent 
the misuse of material, nonpublic information by the investment adviser 
or any of its associated persons.
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    \72\ See Advisers Act section 203(e)(6), 15 U.S.C. 80b-3(e)(6).
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     Recordkeeping Requirements. Under rule 204-2, investment 
advisers must make and keep particular books and records, including 
certain communications relating to advice given (or proposed to be 
given), the placing or execution of any order to purchase or sell any 
security, and copies of the advertisements they disseminate.\73\
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    \73\ See 17 CFR 275.204-2.
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     Privacy and Cybersecurity. Advisers registered or required 
to be registered with the Commission are also subject to Regulation S-P 
and Regulation S-ID, which are discussed above in the context of 
broker-dealers.
Questions: Current Regulatory Compliance Approaches
    3.1 How are firms approaching compliance relating to their use of 
DEPs and the related tools and methods, in order to ensure compliance 
with their obligations under federal securities laws and regulations, 
including those identified above? For example, how do firms supervise 
communications or marketing to retail investors through or in 
connection with DEPs? Do firms approach compliance relating to the use 
of DEPs and related tools and methods differently from how they 
approach compliance relating to other engagement with customers or 
clients? If so, how do the approaches differ? For example, do such 
approaches differ based on any unique risks associated with or innate 
characteristics of DEPs and the related tools and methods?
    3.2 What types of policies and procedures and controls do firms 
establish and maintain to ensure the design, development, and use of 
DEPs and related tools and methods comply with existing obligations? 
How do firms

[[Page 49078]]

supervise the design, development, and use of these features, tools, 
and methods after implementation and adoption for continued compliance? 
In what ways do firms' policies and procedures, controls, and 
supervision differ with respect to their use of DEPs and related tools 
and methods from other policies and procedures, controls, and 
supervision that the firms employ?
    3.3 Do firms implement registration or certification requirements 
for personnel primarily responsible for the design, development, and 
supervision of DEPs? If so, what are the requirements? What type of 
training do firms offer to their personnel in connection with the 
design, development, and use of DEPs and related tools and methods? Do 
firms outsource the design or development of DEPs? Do firms outsource 
the design and development of DEPs outside the United States?
    3.4 What policies, procedures, and controls do firms have in place 
with respect to the use of DEPs that are designed to promote or that 
could otherwise direct retail investors to higher-risk products and 
services, for example, margin services and options trading? What 
policies, procedures, and controls do firms have in place with respect 
to the use of DEPs that are designed to promote or that could otherwise 
direct retail investors to securities or services that are more 
lucrative for the firm such as: Proprietary products, products for 
which the firm receives revenue sharing or other third-party payments, 
or other higher fee products? To what extent do these policies and 
procedures consider or address the characteristics of retail investors 
to whom such products and services may be promoted or directed? For 
example, do the policies and procedures place controls around how DEPs 
may be utilized to promote or otherwise direct certain products or 
services to certain types of retail investors?
    3.5 What disclosures are firms providing in connection with or 
specifically addressing DEPs and the related tools and methods 
(including with respect to any data or information collected from the 
retail investor)? How are such disclosures presented to retail 
investors? Does such disclosure address how the use of DEPs or the 
related tools and methods may affect investors and specifically their 
trading and investing behavior? Does such disclosure differ from other 
disclosures that firms provide? How do firms currently disclose 
information such as risks, fees, costs, conflicts of interest, and 
standard of conduct to retail investors on their digital platforms? To 
what extent and how do firms use DEPs to make such disclosures?
    3.6 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?
    3.7 Are there particular types of DEPs that broker-dealers avoid 
using because they would be recommendations? If so, which DEPs and why? 
What are broker-dealers doing to ensure that the DEPs they adopt comply 
with Reg BI and other sales practice rules, where applicable?
    3.8 Do investment advisers consider the observable impacts of DEPs 
when determining if they are providing investment advice? How does the 
fact that a DEP might impact the behavior of a statistically 
significant number of investors affect this determination? What 
statistical concepts, tools, and quantitative thresholds do investment 
advisers use in making this determination?
    3.9 Are there particular types of DEPs that investment advisers 
avoid using because they would constitute providing investment advice? 
If so, which DEPs and why? How do investment advisers satisfy their 
fiduciary duty when using DEPs and related tools and methods? How do 
investment advisers take into account their fiduciary duty when 
designing and developing DEPs?
    3.10 When providing investment advice or recommendations to a 
retail investor, do firms adjust that investment advice or 
recommendation to take into account any data they have about how their 
DEPs affect investor behavior and investing outcomes? If so, how is 
such investment advice or recommendation adjusted?
    3.11 How do firms using DEPs obtain sufficient retail investor 
information and provide sufficient oversight to satisfy their 
regulatory obligations, including, for example, applicable anti-fraud 
provisions and account opening or approval requirements?
    3.12 How does the recordkeeping process used by firms in connection 
with DEPs and the related tools and methods compare to the 
recordkeeping process used in connection with firms' traditional 
business? Do firms generate and retain records with respect to the 
development, implementation, modification, and use of DEPs, including 
the testing of, or due diligence with respect to, the technology that 
they use for those purposes? Do firms generate and retain records with 
respect to retail investor interaction with such DEPs? If so, what 
types of records?
Questions: Suggestions for Modifications to Existing Regulations or New 
Regulatory Approaches To Address Investor Protection Concerns, 
Including
    3.13 What additions or modifications to existing regulations, 
including, but not limited to, those identified above, or new 
regulations or guidance might be warranted to address investor 
protection concerns identified in connection with the use by broker-
dealers and investment advisers of DEPs, the related tools and methods, 
and the use of retail investor data gathered in connection with DEPs? 
What types of requirements, limitations, or prohibitions would be most 
appropriate to address any such identified investor protection 
concerns?
    3.14 Are there regulations that currently prevent firms from using 
DEPs and related tools and methods in ways that might be beneficial to 
retail investors? If so, what additions or modifications to those 
regulations would make it easier for firms to use DEPs and related 
tools and methods to benefit investors? Are there regulatory approaches 
that would facilitate firms' ability to innovate or test the use of new 
technology consistent with investor protection?
    3.15 To the extent commenters recommend any modifications to 
existing regulations or new regulations, how should DEPs and the scope 
of tools and methods be defined to capture practices and tools and 
methods in use today and remain flexible to adapt as technology 
changes? Should any such modifications or new regulations specifically 
and uniquely address DEPs or the related tools and methods (i.e., 
distinct from regulation of interactions with retail investors such as 
marketing, investment advice, and recommendations)? If so, how? Should 
any such modifications or additional regulations be targeted 
specifically to address certain types of DEPs or certain tools or 
methods? If so, how? For example, should specific DEPs be explicitly 
prohibited or only permitted subject to limitations or other regulatory 
requirements (e.g., filing or pre-approval)?
    3.16 Should any such modifications or additional regulations be 
targeted specifically to address particular risks, such as those 
related to certain types of securities (e.g., options, leveraged and

[[Page 49079]]

inverse funds, or other complex securities), services (e.g., margin), 
or conflicts (e.g., payment and revenue sources)? If so, how? Should 
any such modifications or additional regulations be targeted 
specifically to increase protection for certain categories of investors 
(e.g., seniors or inexperienced investors)? If so, how?
    3.17 Are there laws, regulations, or other conduct standards that 
have been adopted in other contexts, fields, or jurisdictions that 
could serve as a useful model for any potential regulatory approaches?
    3.18 To the extent commenters recommend any modifications to 
existing regulations or new regulations, what economic costs and 
benefits do commenters believe would result from their recommendations? 
Please provide or identify any relevant data and other information.

III. Use of Technology by Investment Advisers To Develop and Provide 
Investment Advice

    The Commission is also issuing the Request to assist the Commission 
and its staff in better understanding the nature of analytical tools 
and other technology used by investment advisers to develop and provide 
investment advice to clients, including (1) oversight of this 
technology; (2) how investment advisers and clients have benefited from 
technology; (3) potential risks to investment advisers, clients, and 
the markets more generally related to this technology; and (4) whether 
regulatory action may be needed to protect investors while preserving 
the ability of investors to benefit from investment advisers' use of 
technology.\74\
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    \74\ While we recognize that broker-dealers similarly use 
analytical tools and other technology for purposes of developing and 
providing recommendations, those issues are not the focus of Section 
III of the Request. However, the Commission welcomes comments on 
these issues relating to broker-dealers as part of the General 
Request for Comment as set forth in Section IV below.
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A. Issues for Consideration

    Financial technology enables investment advisers to develop and 
provide investment advice in new ways or complements existing methods 
or tools for developing and providing advice,\75\ including by allowing 
digital platforms to connect clients, their investment advisers, and 
third-party service providers.\76\ We describe below some recent 
changes in delivery and development of investment advice and the role 
of analytical tools and other technology in each. These changes are 
those that we understand may directly affect clients' receipt of 
investment advice, and some may overlap depending on an adviser's 
particular business model and services.
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    \75\ The International Organization of Securities Commissions 
(``IOSCO'') has stated that the terms financial technologies or 
``Fintech'' are ``used to describe a variety of innovative business 
models and emerging technologies that have the potential to 
transform the financial services industry.'' IOSCO Research Report 
on Financial Technologies (Fintech) at 4 (Feb. 2017), https://www.iosco.org/library/pubdocs/pdf/IOSCOPD554.pdf.
    \76\ Many investment advisers also increasingly use third-party 
service providers to generate investment models (e.g., model 
portfolios) or strategies, and may use software based on, or 
otherwise incorporating, AI/ML models.
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    While the increased role of technology has presented investment 
advisers and clients with benefits, it may also present risks. We 
recognize that some of these risks may be presented, or be presented 
differently, for advisers providing traditional investment advice that 
does not rely on technology. We understand as well that investment 
advisers may weigh differently those potential benefits and risks, 
including those described below, in determining how to use technology 
in developing and providing investment advice. We therefore are seeking 
comment to understand better the tools used by investment advisers to 
develop and provide investment advice and investment advisers' 
understanding and oversight of these tools and the related benefits and 
risks. In addition, we seek comment on other ways in which technology 
has changed investment advisers' development and provision of 
investment advice to their clients.
1. Robo-Advisers
    Some investment advisers, which we refer to here as robo-advisers, 
provide asset management services to their clients through online 
algorithm-based platforms.\77\ The number of robo-advisers (also 
referred to as digital investment advisers, digital advisers, or 
automated advisers) has increased over the past several years.\78\ 
Robo-advisers operate under a variety of business models and have 
varying degrees of human interaction with clients as compared to 
traditional advisers, and some rely exclusively on algorithms to 
oversee and manage individual client accounts.\79\ In some cases, human 
personnel may have limited ability to override an algorithm, even in 
stressed market conditions, and there is limited, if any, direct 
interaction between the client and the adviser's personnel. In other 
cases, robo-advisers offer hybrid advisory services, which pair 
algorithm-generated investment options with human personnel who can 
answer questions, discuss and refine an algorithm-generated investment 
plan (e.g., clarify information where client questionnaire responses 
seem conflicting or address risk tolerance levels based on client 
reaction to stressed market conditions), or provide additional 
resources to clients. Some robo-advisers offer clients a choice between 
hybrid and non-hybrid services, at different price points.
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    \77\ An algorithm can be defined as a routine process or 
sequence of instructions for analyzing data, solving problems, and 
performing tasks. See Dilip Krishna et al., Managing Algorithmic 
Risks: Safeguarding the Use of Complex Algorithms and Machine 
Learning at 3, Deloitte Development LLC (2017) (``Deloitte 
Report'').
    \78\ See, e.g., Investment Adviser Association, 2020 Evolution 
Revolution at 8 (2020), https://higherlogicdownload.s3.amazonaws.com/INVESTMENTADVISER/aa03843e-7981-46b2-aa49-c572f2ddb7e8/UploadedImages/resources/Evolution_Revolution_2020_v8.pdf (noting that by 2020, ``two of the 
top five advisers as measured by number of non-high net worth 
individual clients served [were] digital advice platforms, 
representing 7.5 million clients, an increase of 2.7 million clients 
from [the prior year].''); Robo-Advisers, IM Guidance Update No. 
2017-02 (Feb. 2017), https://www.sec.gov/investment/im-guidance-2017-02.pdf.
    \79\ A robo-adviser or a third party may develop, manage, or own 
the algorithm used to manage client accounts. In some business 
models, a robo-adviser may provide its algorithm or its digital 
platform to another investment adviser. That investment adviser may 
then (i) use the robo-adviser's existing investment options (e.g., 
asset allocation models), (ii) use the algorithm or digital platform 
as a tool to create its own investment options, or (iii) use a 
combination of these features.
---------------------------------------------------------------------------

    In addition to using analytical tools to engage with clients, robo-
advisers may use technology (including AI/ML tools) for a variety of 
other functions. For example, an adviser may use these tools to match 
clients to individual portfolios based on client inputs or determine 
how or when to trade for individual client accounts. An adviser also 
may use these tools to determine asset allocations, determine how to 
fill allocations, generate trading signals, or make other strategic 
decisions.\80\
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    \80\ In addition, FINRA has observed client-facing digital 
advisers that incorporate trade execution, portfolio rebalancing, 
and tax-loss harvesting. See FINRA, Report on Digital Investment 
Advice at 2 (Mar. 2016), https://www.finra.org/sites/default/files/digital-investment-advice-report.pdf (describing digital investment 
tools as tools within two groups: Financial professional-facing 
tools and client-facing tools).
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    All Commission-registered robo-advisers are subject to all of the 
requirements of the Advisers Act, including the requirement that they 
provide advice consistent with the fiduciary duty they owe to 
clients.\81\ Because robo-advisers rely on algorithms, provide advisory 
services over the internet, and may offer limited, if any, direct human 
interaction to their clients, they may raise novel issues when seeking 
to comply with the

[[Page 49080]]

Advisers Act. For example, advisers may need to consider whether and 
how automation affects the development of digital advice and the 
potential risks that such automation may present. An automated 
algorithm may produce investment advice for a particular client that is 
inconsistent with the client's investment strategy or relies on 
incomplete information about the client that depends on limited input 
data. Increased reliance on automated investment advice may result in 
too much importance being placed on clients' responses to account 
opening questionnaires and other forms of automated client evaluation, 
which may not permit nuanced answers or determine when additional 
clarification or information could be necessary. This reliance may also 
result in a failure to detect changes in clients' circumstances that 
may warrant a change in investment strategy.
---------------------------------------------------------------------------

    \81\ See IA Fiduciary Duty Interpretation, supra note 62, at 
n.27.
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    Robo-advisers also must determine how to effectively understand and 
oversee use of their algorithms (including those developed by third 
parties) and the construction of client portfolios, including any 
potential conflicts of interest. For example, robo-advisers' algorithms 
may result in clients being invested in assets in which the adviser or 
its affiliate holds interests or advises separately (e.g., mutual funds 
and exchange-traded funds). In these circumstances, the adviser would 
have a conflict of interest that it must eliminate or fully and fairly 
disclose such that the client can provide informed consent. In 
addition, any override or material changes to the algorithm must result 
in investment advice that is consistent with the adviser's disclosures 
and fiduciary duty.
2. Internet Investment Advisers
    Some investment advisers may solely use an interactive website to 
provide investment advice. These investment advisers, otherwise known 
as ``internet investment advisers,'' are eligible for SEC registration 
even if they do not meet the assets-under-management threshold if they 
satisfy certain criteria, including that they provide advice to all of 
their clients exclusively through their interactive website (``internet 
clients''), subject to a de minimis exception for other clients.\82\ 
The Commission has stated that the internet investment adviser 
exemption was designed to balance the burdens of multiple state 
registration requirements for internet investment advisers with the 
Advisers Act's allocation of responsibility for regulating smaller 
advisers to state securities authorities.\83\
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    \82\ See 17 CFR 275.203A-2(e) (permitting Commission 
registration by an investment adviser that (i) provides investment 
advice to all of its clients exclusively through an interactive 
website, except that the investment adviser may provide investment 
advice to fewer than 15 clients through other means during the 
preceding twelve months; (ii) maintains specified records; and (iii) 
does not control, is not controlled by, and is not under common 
control with, another adviser that registers with the Commission 
solely because of its relationship with the internet investment 
adviser). Internet investment advisers represented only 1.5 percent 
of registered advisers in 2021, but have more than tripled in number 
since 2010--from 57 in 2010 (approximately 0.5 percent of total 
registered investment advisers) to 203 in 2021 (approximately 1.5 
percent of total registered investment advisers). Data from Form 
ADV, Part 1A, Item 2.A.(11) (based on Form ADV filings through July 
2021).
    \83\ See Exemption For Certain Investment Advisers Operating 
through the internet, Advisers Act Release No. 2091 (Dec. 12, 2002) 
[67 FR 77620, 77621 (Dec. 18, 2002)] (``internet Investment Adviser 
Adopting Release'') (``Because an internet Investment Adviser uses 
an interactive website to provide investment advice, the adviser's 
clients can come from any state, at any time. As a result, internet 
Investment Advisers must as a practical matter register in every 
state. This ensures that the adviser's registrations will be in 
place when it later obtains the requisite number of clients from any 
particular state'' that requires state registration.).
---------------------------------------------------------------------------

    For purposes of the exemption, ``interactive website'' means a 
website in which computer software-based models or applications provide 
investment advice to clients based on personal information each client 
supplies through the website. These websites generally require clients 
to answer questions about personal finances and investment goals, which 
the adviser's application or algorithm analyzes to develop investment 
advice that the website transmits to the client. The Commission has 
stated that the exemption is not available to investment advisers that 
merely use websites as marketing tools or use internet tools such as 
email, chat rooms, bulletin boards, and webcasts or other electronic 
media in communicating with clients.\84\ In addition, the Commission 
distinguished the interactive website described in the exemption from 
``other types of websites that aggregate and provide financial 
information in response to user-provided requests that do not include 
personal information.''
---------------------------------------------------------------------------

    \84\ Id. at n.15 and accompanying text. Effective September 19, 
2011, Rule 203A-2(f) was renumbered as Rule 203A-2(e). See Rules 
Implementing Amendments to the Investment Advisers Act of 1940, 
Advisers Act Release No. 3221 (June 22, 2011) [76 FR 42950, 42963 
(July 19, 2011)].
---------------------------------------------------------------------------

    This exemption is limited in scope. In the Internet Investment 
Adviser Adopting Release, the Commission stated that internet 
investment advisers typically are not eligible to register with the 
Commission because they ``do not manage the assets of their internet 
clients'' and thus do not meet the statutory threshold for registration 
with the Commission. Further, the Commission stated that, in order to 
be eligible for registration under this exemption, an investment 
adviser ``may not use its advisory personnel to elaborate or expand 
upon the investment advice provided by its interactive website, or 
otherwise provide investment advice to its internet clients.'' The 
exemption generally requires that the investment adviser ``provides 
investment advice to all of its clients'' through its website, which 
means that the adviser must operate an interactive website through 
which advice is given. That is, the exemption is unavailable to 
investment advisers lacking such a website.
    Despite the limited nature of the exemption, we understand that 
some investment advisers may seek to rely on it and to register with 
the Commission without meeting the exemption's terms or intended 
purpose.\85\ Examinations of investment advisers relying on the 
exemption have revealed various reasons for non-compliance with the 
exemption's requirements, including: (i) Failure to understand the 
eligibility requirements; (ii) websites that were not interactive; 
(iii) businesses that became dormant but did not withdraw their 
registration; and (iv) client access to advisory personnel who could 
expand upon the investment advice provided by the adviser's interactive 
website, or otherwise provide investment advice to clients, such as 
financial planning.
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    \85\ The Commission has cancelled the registrations of advisers 
where the Commission found that those advisers did not meet the 
terms of the exemption. See, e.g., Order Cancelling Registration 
Pursuant to Section 203(h) of the Investment Advisers Act of 1940, 
Advisers Act Release No. 5110 (Feb. 12, 2019).
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    Some robo-advisers may provide a broader array of advisory services 
than those provided by internet investment advisers but not be eligible 
for Commission registration unless they can rely on another exemption 
or until they have met the statutory assets-under-management 
threshold.\86\ Prohibiting these investment advisers from registering 
with the Commission in these circumstances could impose burdens that 
the internet investment adviser exemption was intended to alleviate. 
Finally, because the internet investment adviser exemption was 
established almost twenty years ago, we seek to understand better how

[[Page 49081]]

investment advisers are relying on it and whether we should consider 
amending the exemption or creating another exemption that reflects 
investment advisers' current use of technology in providing investment 
advice.
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    \86\ Some of these advisers also may be eligible for the 
``multi-state adviser exemption'' under 17 CFR 275.203A-2(d). The 
multi-state adviser exemption permits an adviser who is required to 
register as an investment adviser with fifteen or more states to 
register with the Commission.
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3. AI/ML in Developing and Providing Investment Advice \87\
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    \87\ Investment advisers' use of AI/ML and other technological 
tools must comply with existing rules and regulations. The 
Commission is not expressing a view as to the legality or conformity 
of such practices with the federal securities laws and the rules and 
regulations thereunder, nor with the rules of self-regulatory 
organizations.
---------------------------------------------------------------------------

    Investment advisers may use, or be considering the use of, software 
or models based on, or otherwise incorporating, AI/ML (including deep 
learning, supervised learning, unsupervised learning, and reinforcement 
learning) in developing and providing investment advice, including by 
supporting human personnel's decision-making.\88\ Investment advisers 
may use such models or software to devise trading and investment 
strategies or develop investment advice, including to assess large 
amounts of data or to provide clients with more customized service.\89\ 
In addition, investment advisers may use these tools to monitor client 
accounts or track the performance of specific securities or other 
investments.\90\
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    \88\ Advisers may also use AI as part of their internal 
operations, including by reviewing and classifying information 
(e.g., in regulatory filings and fund prospectuses), by assisting 
with trade matching or custodian reconciliation, for risk 
measurement (in part through earlier and more accurate estimation of 
risks) and stress testing purposes, and by facilitating regulatory 
compliance.
    \89\ See, e.g., Treasury RFI, supra note 11, at 16839 
(describing potential benefits of financial institutions' use of 
AI); see also FINRA AI Report, supra note 11 (highlighting three 
broad areas where broker-dealers are evaluating or using AI: 
Communications with customers, investment processes, and operational 
functions); FSB AI Report, supra note 11, at 27.
    \90\ Advisers may obtain these AI/ML tools in connection with 
contracting for cloud services. They may use other types of Fintech, 
as well, such as financial aggregator platforms that allow advisers 
to access information about clients' financial accounts, which can 
inform investment advice. Clients may allow such platforms to access 
information about their investment accounts and performance to 
enable a more fulsome analysis of their financial resources and 
investment experience.
---------------------------------------------------------------------------

    Because ML models learn and develop over time, advisory personnel 
may face challenges in monitoring and tracking them, including 
reviewing both a model's input to assess whether it is appropriate and 
its output to assess accuracy or relevance.\91\ For example, advisory 
personnel may lack sufficient knowledge or experience, or rely heavily 
on limited personnel, to challenge models' results. In addition, there 
may be systemic risks associated with the use of these technologies, 
including potential interconnectedness across the financial system and 
an emerging dependency on certain concentrated infrastructure and 
widely used models, which could propagate risks across the financial 
system. Further, different market participants may use technologies of 
varying or inadequate quality that could prompt investment advisers to 
provide unsuitable advice to their clients.
---------------------------------------------------------------------------

    \91\ See, e.g., IOSCO, The Use of Artificial Intelligence and 
Machine Learning by Market Intermediaries and Asset Managers at 11 
(June 2020) (consultation report), https://www.iosco.org/library/pubdocs/pdf/IOSCOPD658.pdf (``Unlike traditional algorithms, ML 
algorithms continually learn and develop over time. It is important 
that they are monitored to ensure that they continue to perform as 
originally intended.'').
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4. Potential Benefits
    The use of technology in developing and providing investment advice 
has provided certain benefits to investment advisers and, in turn, 
their clients. For example, digital advisers and internet investment 
advisers may offer lower cost advisory services. They also may provide 
attractive, user-friendly design features that clients appreciate, and 
may offer advisory services and online access at all hours of the 
day.\92\ Digital investment advice may be more accessible than human 
advisory personnel to a wider range of clients, including clients who 
have greater confidence in digital investment advice; may facilitate 
access to a wider range of investment advisers, including through 
increased competition and a potential for lower fees; and may permit 
clients to easily access information about their account and 
investments.\93\ In addition, digital advisers may be less prone to 
``behavioral biases, mistakes, and illegal practices'' than human 
personnel.\94\ By using AI-based software and methods, advisers may 
provide clients more customized advice or advice that benefits from 
analysis of more information (or types of information) on a more cost-
effective basis than could be provided using traditional tools. In 
addition, investment advisers may use AI/ML to enhance and expand their 
services, generate investment strategies, and expand access to 
investment advice.\95\ Clients may benefit from investment advisers' 
ability to use this this technology to improve trade execution, as 
well. In addition, AI-based tools may substantially enhance 
efficiencies in information processing, reducing information 
asymmetries, and contributing to the efficiency and stability of 
markets.
---------------------------------------------------------------------------

    \92\ See, e.g., Coryanne Hicks, What Is a Robo Advisor and When 
to Use One, U.S. News & World Report (Feb. 18, 2021), https://money.usnews.com/financial-advisors/articles/what-is-a-robo-advisor-and-when-to-use-one.
    \93\ See, e.g., European Securities and Markets Authority 
(``ESMA'') et al., Joint Committee Discussion Paper on Automation in 
Financial Advice at 16-17 (Dec. 4, 2015) (``ESMA Discussion 
Paper''), https://esas-joint-committee.europa.eu/Publications/Discussion%20Paper/20151204_JC_2015_080_discussion_paper_on_Automation_in_Financial_Advice.pdf; see also ESMA et al., Report on Automation in Financial 
Advice at 8-9 (2016) (``ESMA Report''), https://esas-joint-committee.europa.eu/Publications/Reports/EBA%20BS%202016%20422%20(JC%20SC%20CPFI%20Final%20Report%20on%20autom
ated%20advice%20tools).pdf (discussing views on the benefits and 
risks of automated advice from respondents to the ESMA Discussion 
Paper).
    \94\ S[ouml]hnke M. Bartram, J[uuml]rgen Branke, and Mehrshad 
Motahari, Artificial Intelligence in Asset Management, CFA Institute 
Research Foundation Literature Review 25 (2020) (``CFA Literature 
Review''), https://www.cfainstitute.org/-/media/documents/book/rf-lit-review/2020/rflr-artificial-intelligence-in-asset-management.ashx; see also ESMA Discussion Paper, supra note 93, at 
17 (``A well-developed algorithm may be more consistently accurate 
than the human brain at complex repeatable regular processes, and in 
making predictions. Automated advice tools therefore could reduce 
some elements of behavioural biases, human error, or poor judgement 
that may exist when advice is provided by a human. A well-developed 
algorithm could ensure equal and similar advice to all consumers 
with similar characteristics.''). But see ESMA Report, supra note 
93, at 9 (stating that several respondents ``stated that whether or 
not automated advice is more consistent and accurate depends on both 
the underlying logic of the algorithm and the quality and 
completeness of the information inputted''); text accompanying infra 
note 97.
    \95\ See, e.g., World Economic Forum, The New Physics of 
Financial Services: Understanding How Artificial Intelligence is 
Transforming the Financial Ecosystem 114-123 (Aug. 2018), https://www3.weforum.org/docs/WEF_New_Physics_of_Financial_Services.pdf.
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5. Potential Risks
    At the same time, these developments may pose new or different 
risks to clients, including risks presented by investment advisers' 
reliance on technology and any third parties that provide or service 
such technology. For example, digital advisers may limit clients' 
access to human personnel, including when clients are considering major 
life changes such as retirement or when clients have questions that are 
highly fact-specific. Clients of internet investment advisers may have 
issues accessing the interactive websites, which can present unique 
challenges when the website is the sole means for advice delivery. The 
quality of the investment advice may depend on an algorithm that human 
personnel may monitor infrequently, incorrectly or face challenges 
overseeing.\96\ The use of

[[Page 49082]]

algorithms may be subject to their own risks, including risks related 
to the input data (such as a mismatch between data used for training 
the algorithm and the actual input data used during operations), 
algorithm design (such as flawed assumptions or judgments), and output 
decisions (such as disregard of underlying assumptions).\97\ Digital 
advisers may encourage clients to trade more to the extent that the 
adviser integrates trade execution services, which may benefit the 
adviser at the expense of the client.\98\ Depending on the quality, 
recency, and thoroughness of a client's information incorporated into 
an algorithm, as well as how broadly client risk tolerances or 
investment goals are generalized by the algorithm, the use of 
algorithms may cause some clients to receive investment advice that is 
less individualized than they reasonably expect. Similarly, clients may 
face risks when AI/ML models use poor quality, inaccurate, or biased 
data that produces outputs that are or lead to poor or biased advice. 
In this respect, biased data may be incorporated unintentionally 
through use of data sets that include irrelevant or outdated 
information, including information that exists due to historical 
practices or outcomes, or through the selection by human personnel of 
the data or types of data to be incorporated into a particular 
algorithm.\99\
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    \96\ See, e.g., In the Matter of AXA Rosenberg Group LLC et al., 
Advisers Act Release No. 3149 (Feb. 3, 2011) (settled action); see 
also In the Matter of Barr M. Rosenberg, Advisers Act Release No. 
3285 (Sept. 22, 2011) (settled action) (finding, in part, that an 
adviser breached his fiduciary duty by directing others to keep 
quiet about, and delay fixing, a material error in computer code 
underlying his company's automated model).
    \97\ See Deloitte Report, supra note 77, at 4.
    \98\ See CFA Literature Review, supra note 94, at 25 (``At the 
same time, because robo-advisors have trade execution services 
integrated into them, they often encourage investors to trade more. 
This increased trading can be both a benefit, in terms of 
encouraging investors to rebalance positions more often, and a 
pitfall, because it can lead to excessive trading that benefits 
robo-advising systems through commissions at the expense of 
investors.'').
    \99\ See FINRA AI Report, supra note 11, at 14; see also 
Treasury RFI, supra note 11, at 16840 (``Because the AI algorithm is 
dependent upon the training data, an AI system generally reflects 
any limitations of that dataset. As a result, as with other systems, 
AI may perpetuate or even amplify bias or inaccuracies in the 
training data, or make incorrect predictions if that data set is 
incomplete or non-representative.''); Jessica Fjeld et al., 
Principled Artificial Intelligence: Mapping Consensus in Ethical and 
Rights-based Approaches to Principles for AI 47-49 (Berkman Klein 
Center for internet & Society at Harvard University, Research 
Publication, 2020).
---------------------------------------------------------------------------

    To the extent that a third party, rather than the investment 
adviser, develops the analytical tools, the adviser may face challenges 
in understanding or overseeing those third parties or the technology. 
For example, there may be challenges in cases where software or a model 
is based on an approach or technology that is proprietary to the third 
party or is hosted by a third party, or where the investment adviser's 
personnel do not have the knowledge or experience necessary to 
understand the technology or to challenge its results. These 
circumstances may exacerbate exposure of investment advisers and their 
clients to cybersecurity and data privacy risks. Further, these risks 
may affect more clients than those posed by investment advisers using 
traditional methods because of the scale at which investment advisers 
are able to reach clients through digital platforms.
    Clients' ability to understand these and other risks rests on the 
quality and sufficiency of their investment advisers' disclosures, 
which may be particularly important to the extent that these 
developments reflect the use of underlying technology that is complex 
or otherwise requires technical expertise. Disclosure can put clients 
in a position to understand the different roles played by technology 
and advisory personnel in developing the investment advice that clients 
receive. Investment advisers may face challenges in disclosing 
sufficiently these types of risks where any such disclosure might be 
necessarily technical.
    There may also be systemic risks associated with widespread use of 
AI/ML, including deep learning, supervised learning, unsupervised 
learning, and reinforcement learning, which may affect the maintenance 
of fair, orderly, and efficient markets. For example, the Financial 
Stability Board has stated that ``applications of AI and machine 
learning could result in new and unexpected forms of interconnectedness 
between financial markets, for instance based on the use by various 
institutions of previously unrelated data sources.'' \100\ In addition, 
there could be systemic risk to the extent that digital advisers employ 
models (including models from third-party model providers) that rely on 
past performance and volatility, which could constitute input data that 
is inappropriate for the current market. These and other risks may 
continue to grow as the use of AI continues to increase among 
investment advisers.
---------------------------------------------------------------------------

    \100\ FSB AI Report, supra note 11, at 1.
---------------------------------------------------------------------------

    We request comment on all aspects of investment advisers' use of 
technology, particularly with respect to developing and providing 
investment advice, and the potential effect on investor protection and 
regulatory compliance. We specifically request comment on the 
following:
    4.1 How do investment advisers currently use technology in 
developing and providing investment advice? What types of technology do 
advisers use for these purposes? How do investment advisers use 
technology in any quantitative investment processes that they employ?
    4.2 Are our descriptions of the potential benefits and risks of 
investment advisers' use of technology in developing and providing 
investment advice accurate and comprehensive? If not, what additional 
benefits or risks to advisory clients are there from such use? What 
additional benefits or risks does using these types of technology 
provide to investment advisers? How do investment advisers weigh these 
benefits and risks in using technology to develop and provide 
investment advice? Does technology enable investment advisers to 
develop investment advice in a more cost-effective way and are clients 
able to receive less expensive advice as a result? Does technology 
increase access to investment advice for some clients who would 
otherwise not afford it or mitigate (or have the potential to mitigate) 
biases in the market that may have prevented access to some clients or 
prospective clients? Are there risks associated with the quality of 
services clients ultimately receive? If so, what are they and how do 
investment advisers address such risks? What factors do advisory 
clients consider in choosing to engage a robo-adviser rather than a 
traditional investment adviser? In what ways does investment advice 
developed or provided by a robo-adviser differ from investment advice 
developed or provided by a traditional investment adviser?
    4.3 To the extent investment advisers use technology in developing 
and providing investment advice, do advisers assess whether the 
technology or its underlying models are explainable to advisory 
personnel or to clients? Is the technology or underlying model 
explainable? To what extent do investment advisers assess whether the 
results are reproducible? If so, are the results reproducible? To what 
extent do investment advisers rely on third parties to make these 
assessments?
    4.4 How do investment advisers develop, test, deploy, monitor, and 
oversee the technology they use to develop and provide investment 
advice? Do investment advisers develop, test, and monitor AI/ML models 
differently from how they develop, test, and monitor traditional 
algorithms? How do investment advisers assess the effect on client 
accounts of any material change to advisers' technology, algorithm, or

[[Page 49083]]

model prior to implementation? Do investment advisers communicate with 
clients about such material changes? If so, how?
    4.5 What, if anything, do investment advisers do to understand how 
AI/ML models will operate during periods of unusual or volatile market 
activity or other periods where such models may have less, or less 
relevant, input data with which to operate? How does the use of these 
models by investment advisers affect the market more generally? What 
formal governance mechanisms do investment advisers have in place for 
oversight of the vendors that create or manage these models?
    4.6 How do investment advisers disclose the use of algorithms or 
models to their clients, including the role of advisory personnel or 
third parties in creating and managing these algorithms or models? Do 
these disclosures address any effects that such use may have on client 
outcomes? When investment advice is developed and provided through an 
automated algorithm, how do advisers disclose the use of that automated 
algorithm? Do investment advisers assess how effective these 
disclosures are in informing clients about such use? If so, how 
effective are such disclosures? Please provide any available data to 
show how effective such disclosures are. What are clients' expectations 
for investment advice produced by an investment adviser's automated 
algorithm, and how are those expectations shaped by investment 
advisers' disclosures?
    4.7 How do investment advisers account for the use of any poor 
quality, inaccurate, or biased data that are used by AI/ML models, and 
how do investment advisers determine the effect of this kind of data on 
the algorithms' output or seek to reduce the use of this kind of data? 
To what extent can the use of AI/ML models in developing investment 
advice perpetuate social biases and disparities? How have commenters 
seen this in practice with regard to the use of AI/ML models (e.g., 
through marketing, asset allocation, fees, etc.)? To what extent and 
how do investment advisers employ controls to identify and mitigate any 
such biases or disparities? For example, do investment advisers 
evaluate the output of their models to identify and mitigate biases 
that would raise investor protection concerns? Do investment advisers 
utilize human oversight to identify biases that would raise investor 
protection concerns, in both the initial coding of their models or in 
the resulting output of those models?
    4.8 Are there any particular challenges or impediments that 
investment advisers face in using AI/ML to develop and provide 
investment advice? If so, what are they and how do investment advisers 
address such challenges or impediments and any risks associated with 
them?
    4.9 When relying on AI/ML models to develop investment advice, how 
do advisers determine whether those models are behaving as expected? 
How do advisers verify the quality of the assumptions and methodologies 
incorporated into such models? How frequently do advisers test these 
models? For example, do advisers test a model each time it is updated? 
What model risk management steps should advisers undertake? What is 
advisers' understanding of their responsibility to monitor, test, and 
verify model outputs? How do advisers' approaches with respect to AI/ML 
models differ from other models that advisers may use in developing 
investment advice?
    4.10 In the context of developing and providing investment advice, 
what is the objective function of AI/ML models (e.g., revenue 
generation)? What are the inputs relied on by AI/ML models used in 
developing and providing investment advice (e.g., visual cues or 
feedback)? Does the ability to collect individual-specific data impact 
the effectiveness of the AI/ML model in maximizing its objective 
functions?
    4.11 What cybersecurity and data security risks result from 
investment advisers' use of technology in developing and providing 
investment advice? How do investment advisers address or otherwise 
manage those risks and how do investment advisers disclose these risks 
to clients? Do investment advisers believe that delivering investment 
advice through email, which may be encrypted, is more secure than 
delivery through online client portals? Conversely, do investment 
advisers believe that delivery through online client portals is more 
secure? How do investment advisers address these concerns when clients 
are using mobile apps?
    4.12 How do investment advisers generate records to support the 
investment advice they develop from using these types of technology? 
What types of records do they produce and how do investment advisers 
retain them? Does an investment adviser's recordkeeping process differ 
based on the type of technology it uses? If so, how?
    4.13 Do investment advisers generate and retain records with 
respect to the testing of, or due diligence with respect to, the 
technology that they use in developing and providing investment advice?
    4.14 To what extent do investment advisers market the types of 
technology the adviser uses in developing and providing investment 
advice? To the extent investment advisers market their use of 
technology, do advisers demonstrate that use to clients? To what extent 
do prospective and existing clients seek to assess investment advisers' 
understanding of the technology, or seek to understand the technology 
for themselves, in determining whether to hire or retain an investment 
adviser? If prospective or existing clients make such an assessment, 
how do they do so?
    4.15 How do investment advisers disclose the types of technology 
used in developing and providing investment advice? What types of 
potential risks and conflicts of interest are disclosed? How are fees 
disclosed? To what extent does investment advisers' use of technology 
produce conflicts of interest that are similar to those of investment 
advisers that do not use such technologies? To what extent does 
investment advisers' use of technology produce conflicts that result 
from such use?
    4.16 In what ways do investment advisers assess whether using these 
types of technology to develop and provide investment advice enables 
them to satisfy their fiduciary duty to their clients? How do 
investment advisers assess their ability to satisfy their duty of care 
and duty of loyalty when using these types of technology? How does an 
investment adviser determine whether the advice produced by its 
automated algorithm is in the best interest of a particular client? To 
what extent and how often do advisory personnel review investment 
advisers' algorithms to be sure that such advice is in the client's 
best interest? In conducting such review, to what extent do advisory 
personnel understand the algorithm, how it was created, and how it 
operates in practice? How do advisers take into account their fiduciary 
duty when developing, testing, monitoring, and overseeing these types 
of technology? To what extent do investment advisers rely on technology 
vendors or other third parties to provide technical knowledge so that 
advisers can understand the algorithms and the information or analysis 
they generate? When relying on such vendors or third parties, how do 
investment advisers assess whether the investment advisers are able to 
satisfy their duty of care and duty of loyalty?
    4.17 What types of policies and procedures do investment advisers

[[Page 49084]]

maintain with respect to the technologies they use in developing and 
providing investment advice to clients? For example, do these 
investment advisers maintain policies and procedures under rule 206(4)-
7 of the Advisers Act that are designed to address the technologies 
that they use or provide to clients? How do investment advisers' 
policies and procedures address their use of technology and the duties 
they owe their clients? Do they address how advisers determine how to 
incorporate information or analysis developed by these types of 
technologies into investment advice that satisfies their fiduciary 
duty? If so, how? How do investment advisers introduce new technology 
to their personnel?
    4.18 What types of operational risks do investment advisers face 
using digital platforms to interact with clients? How do investment 
advisers interact with clients when the platform is unavailable--for 
example, when the adviser has lost internet service or when the 
platform is undergoing maintenance? What alternative means of 
communication are available to clients during those times? When issues 
arise, is the investment adviser responsible to the client for 
resolving those issues, or does the investment adviser rely on others 
to resolve the issues or to be responsible to the client? What terms of 
service do investment advisers put in place with cloud service 
providers in connection with the potential for loss of service or loss 
of data? We understand that investment advisers, like other financial 
services companies, may rely on a small number of cloud service 
providers.\101\ What risks does this reliance present to the industry 
(and advisory clients)?
---------------------------------------------------------------------------

    \101\ See, e.g., Sophia Furber, As `Big Tech' Dominates Cloud 
Use for Banks, Regulators May Need to Get Tougher, S&P Global (Aug. 
18, 2020), https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/as-big-tech-dominates-cloud-use-for-banks-regulators-may-need-to-get-tougher-59669007.
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    4.19 Under what circumstances do robo-advisers typically override 
their algorithm, and in what ways? What steps do robo-advisers take to 
ensure that any override of the algorithm is consistent with the 
adviser's disclosure and clients' best interest? Do robo-advisers 
document their determinations to override the algorithm and, if so, 
what specifically is documented? What have robo-advisers found to be 
the outcomes from overriding an algorithm?
    4.20 When evaluating digital platforms, how do investment advisers 
weigh the platform's cost and quality of service?
    4.21 Should the Commission consider amending Form ADV to collect 
information about the types of technology that advisers use to develop 
and provide investment advice? If so, what type of technology and why? 
What information about technology should we consider collecting? Should 
the Commission require investment advisers to describe their efforts to 
monitor the outputs of technology upon which they rely? Should the 
Commission consider another method of collecting this information?
    4.22 What costs or benefits do investment advisers experience in 
registering with the Commission under the exemption for internet 
investment advisers? What costs or benefits do clients of internet 
investment advisers experience as compared to clients of other 
investment advisers registered with the Commission? Do commenters 
believe that the exemption for internet investment advisers should be 
updated in any way, including to facilitate its use or to modernize it? 
Are its conditions appropriate? Should we consider changes to, for 
example, the de minimis exception for non-internet clients or the 
recordkeeping requirement? Should we consider changes to the 
exemption's definition of ``interactive website''? Should the exemption 
specify what it means to provide investment advice ``exclusively'' 
through the interactive website? Would additional guidance on any of 
the exemption's conditions or definitions be useful?
    4.23 The Commission has stated that an investment adviser relying 
on the internet investment adviser exemption ``may not use its advisory 
personnel to elaborate or expand upon the investment advice provided by 
its interactive website, or otherwise provide investment advice to its 
internet clients.'' \102\ Should the Commission consider eliminating or 
modifying this language? Should the Commission consider changes to the 
exemption that reflect or otherwise address this language? Should the 
Commission provide additional guidance about the internet investment 
adviser exemption?
---------------------------------------------------------------------------

    \102\ Internet Investment Adviser Adopting Release, supra note 
83, at 77621.
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    4.24 As discussed above, the Commission acknowledged that the 
internet investment adviser exemption was designed to balance these 
advisers' multiple state registration requirements with the Advisers 
Act's allocation of responsibility for regulating smaller advisers to 
state securities authorities. Consistent with this design, are there 
changes to the exemption that might help to ensure that it encompasses 
those investment advisers that provide advice through the internet 
while ensuring that advisers that use the internet only as a marketing 
tool, for example, remain subject to state registration? Should the 
Commission consider creating a registration exemption that reflects 
investment advisers' current use of technology in providing investment 
advice in a better way than the internet investment adviser exemption?
    4.25 To what extent do investment advisers use digital platforms 
and other analytical tools in connection with wrap fee programs? \103\ 
For example, do these programs use model portfolios or portfolio 
allocation models (whether developed by the investment adviser or by a 
third party that provides such models to the adviser for its use) to 
recommend investor allocations? \104\ Do wrap fee programs with an 
online presence allow clients to engage directly with the portfolio 
manager managing the client's assets or provide access to a wider array 
of service providers than the client might otherwise have? Are there 
concerns with respect to these programs for clients with minimal or no 
trading activity as commissions for trade execution have moved toward 
zero? \105\

[[Page 49085]]

Are such concerns different for wrap fee programs sponsored by robo-
advisers as compared to those sponsored by traditional investment 
advisers?
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    \103\ In a wrap fee program, clients generally are charged one 
fee in exchange for investment advisory services, the execution of 
transactions, and custody (or safekeeping) as well as other 
services. An adviser acting as a sponsor to such a program may 
choose the service providers, including other investment advisers, 
and provide clients with access to those services through internet-
based platforms that enable clients to engage directly with service 
providers.
    \104\ A model portfolio generally consists of a diversified 
group of assets (often mutual funds or ETFs) designed to achieve a 
particular expected return with exposure to corresponding risks that 
are rebalanced over time. See Morningstar, 2020 Model Portfolio 
Landscape (2020) (noting that, while models can focus on a single 
asset class, most models combine multiple asset classes). Model 
portfolios are distinct from portfolio allocation models, which can 
be educational tools that investors use to obtain a general sense of 
which asset classes (as opposed to which specific securities) are 
appropriate for the investor to allocate its assets to (e.g., 
appropriate balance of equities, fixed income, and other assets 
given age and other facts and circumstances).
    \105\ See generally Securities and Exchange Commission, Division 
of Examinations, Risk Alert: Observations from Examinations of 
Investment Advisers Managing Client Accounts That Participate in 
Wrap Fee Programs (July 21, 2021), at 4 (``Infrequent trading in 
wrap fee accounts was also identified at several examined advisers, 
raising concerns that clients whose wrap fee accounts are managed by 
portfolio managers with low trading activity are paying higher total 
fees and costs than they would in non-wrap fee accounts.''), https://www.sec.gov/files/wrap-fee-programs-risk-alert_0.pdf. The Risk 
Alert represents the views of the staff of the Division of 
Examinations. It is not a rule, regulation, or statement of the 
Commission. The Commission has neither approved nor disapproved its 
content. The Risk Alert, like all staff statements, has no legal 
force or effect: It does not alter or amend applicable law, and it 
creates no new or additional obligations for any person.
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    4.26 To what extent do robo-advisers (as well as other sponsors of 
investment advisory programs) rely on Rule 3a-4 to determine that they 
are not sponsoring or otherwise operating investment companies under 
the Investment Company Act of 1940 (the ``Investment Company Act'')? 
\106\ If such sponsors do not rely on the rule, what policies and 
practices have sponsors adopted to prevent their investment advisory 
programs from being deemed to be investment companies?
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    \106\ See 17 CFR 270.3a-4. Certain discretionary investment 
advisory programs may meet the definition of ``investment company'' 
under the Investment Company Act, but the Commission has indicated 
that investment advisory programs that provide each client with 
individualized treatment and the ability to maintain indicia of 
ownership of the securities in their accounts are not investment 
companies. Whether such a program is an investment company is a 
factual determination and depends on whether the program is an 
issuer of securities under the Investment Company Act and the 
Securities Act. Rule 3a-4 under the Investment Company Act provides 
a non-exclusive safe harbor from the definition of ``investment 
company'' to investment advisory programs that are organized and 
operated in the manner provided in the rule. A note to the rule also 
states that there is no registration requirement under Section 5 of 
the Securities Act for programs that rely on the rule, and that the 
rule is not intended to create any presumption about a program that 
does not meet the rule's provisions.
---------------------------------------------------------------------------

    4.27 To satisfy the conditions of Rule 3a-4, among other things, a 
sponsor and personnel of the manager of the client's account who are 
knowledgeable about the account and its management must be reasonably 
available to the client for consultation. The rule does not dictate the 
manner in which such consultation with clients should occur. How do 
sponsors and other advisers satisfy this condition? Should we consider 
amending Rule 3a-4 to address technological developments, such as 
chatbots and/or other responsive technologies providing novel ways of 
interacting with clients? Should the Commission address these 
developments in some other way? Should the Commission provide 
additional guidance about this condition? If yes, what specifically 
should this guidance address?
    4.28 To satisfy the conditions of Rule 3a-4, among other things, 
each client's account must be managed on the basis of the client's 
financial situation and investment objectives. Sponsors must obtain 
information from each client about their financial situation and 
investment objectives at account opening and must contact each client 
at least annually thereafter to determine whether there have been any 
changes in the client's financial situation or investment objectives. 
The Commission stated that the receipt of individualized advice is 
``one of the key differences between clients of investment advisers and 
investors in investment companies.'' \107\ How do sponsors ensure that 
they have sufficient information about a client's financial situation 
and investment objectives to provide investment advice that is in the 
best interest of the client, including advice that is suitable for the 
client? Given the availability of new technology for developing and 
providing investment advice, does a sponsor's reliance on Rule 3a-4 
heighten the risk of clients receiving unsuitable advice? If so, are 
there other requirements or conditions that might address this risk?
---------------------------------------------------------------------------

    \107\ See Status of Investment Advisory Programs under the 
Investment Company Act of 1940, Investment Company Act Rel. No. 
21260 (July 27, 1995), 60 FR 39574 (Aug. 2, 1995). The Commission 
also stated that to fulfill its duty to provide only suitable 
investment advice, ``an investment adviser must make a reasonable 
determination that the investment advice provided is suitable for 
the client based on the client's financial situation and investment 
objectives. The adviser's use of a model to manage client accounts 
would not alter this obligation in any way.'' See Status of 
Investment Advisory Programs under the Investment Company Act of 
1940, Investment Company Act Rel. No. 22579 (Mar. 24, 1997), 62 FR 
15098 (Mar. 31, 1997).
---------------------------------------------------------------------------

    4.29 One of the conditions of Rule 3a-4 is that investment advisory 
programs relying on the rule be managed in accordance with any 
reasonable restrictions imposed by the client on the management of the 
client's account. In addition, the client must have the opportunity to 
impose reasonable restrictions at the time the account is opened and 
must be asked at least annually whether the client might wish to impose 
any reasonable restrictions or reasonably modify existing restrictions. 
The Commission explained that the ability of a client to impose 
reasonable restrictions on the management of a client account is a 
critical difference between a client receiving investment advisory 
services and an investor in an investment company. Since the rule was 
adopted, enhanced technological capabilities and industry practices may 
have made it practical for sponsors to provide clients with other means 
of receiving meaningful individualized treatment regarding the 
management of their accounts. Do sponsors of investment advisory 
programs currently provide their clients with ways of customizing or 
personalizing their accounts other than through the imposition of 
reasonable restrictions? If yes, please provide examples of such 
practices. To what extent do clients avail themselves of those options 
for individualized treatment and do they find them to be valuable or 
important? Should we consider amending Rule 3a-4 to address these 
developments or should we address them in some other way, such as by 
providing additional guidance about this condition?
    4.30 In view of the variety and increasing availability of 
technologies used by investment advisers to develop and provide 
investment advice, are there other regulatory matters that the 
Commission should consider? If so, what are they, and why? To the 
extent commenters recommend any modifications to existing regulations 
or additional regulations, what economic costs and benefits do 
commenters believe would result from their recommendations? Please 
provide or identify any relevant data and other information.

IV. General Request for Comment

    This Request is not intended to limit the scope of comments, views, 
issues, or approaches to be considered. In addition to broker-dealers, 
investment advisers and investors, we welcome comment from other 
interested parties, researchers and particularly welcome statistical, 
empirical, and other data from commenters that may support their views 
or support or refute the views or issues raised by other commenters.

    By the Commission.

    Dated: August 27, 2021.
Vanessa A. Countryman,
Secretary.

Appendix A--Tell Us About Your Experiences With Online Trading and 
Investment Platforms

    We're asking individual investors like you what you think about 
online trading or investment platforms such as websites and mobile 
applications (``apps''). It's important to us at the SEC to hear 
from investors who trade and invest this way so we can understand 
your experiences.
    Please take a few minutes to answer any or all of these 
questions. Please provide your comments on or before October 1, 
2021--and thank you for your feedback!
    1. Do you have one or more online trading or investment 
accounts?

[cir] Yes, I have one or more accounts that I access online using a 
computer.
[cir] Yes, I have one or more accounts that I access using a mobile 
app.
[cir] Yes, I have one or more accounts that I access both online 
using a computer and using a mobile app.
[cir] Yes, I have one or more accounts that I access online, either 
using a computer or a mobile app, but I also access the account(s) 
in other ways (e.g., by calling or visiting in person).

[[Page 49086]]

[cir] I have one or more accounts, but I do not access them online 
using a computer or using a mobile app.
[cir] No, I don't have a trading or investment account.

    2. If your response to Question 1 is ``Yes'', do you think you 
would trade or invest if you could not do so online using a computer 
or using a mobile app?

[cir] Yes
[cir] No
    3. On average, how often do you access your online account?

[cir] Daily/more than once a day
[cir] Once to a few times a week
[cir] Once to a few times per month
[cir] Less often than once a month
[cir] Never
[cir] Other

    If Other, Explain:

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    4. On average, how often are trades made in your online account, 
whether by you or someone else?

[cir] Daily/more than once a day
[cir] Once to a few times a week
[cir] Once to a few times per month
[cir] Less often than once a month
[cir] Never
[cir] Other

    If Other, Explain:

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    5. If you access your account online, did you have the account 
first, and only began to access it electronically later? Or did you 
open the account with the idea that you would access it 
electronically immediately?

[cir] I had a pre-existing account and downloaded an app or visited 
a website to access my account.
[cir] I downloaded an app or visited a website first, and then 
opened up an account with the company.

    6. My goals for trading or investing in my online account are 
(check all that apply):

[squ] Keep the amount of money I have, while keeping up with 
inflation
[squ] Save and grow my money for short-term goals (in the next year 
or two)
[squ] Save and grow my money for medium- to long-term goals
[squ] Have fun
[squ] Other

    If Other, Explain:

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    7. What would you like us to know about your experience with the 
features of your online trading or investment platform? (Examples of 
features are: Social networking tools; games, streaks, or contests 
with prizes; points, badges, and leaderboards; notifications; 
celebrations for trading; visual cues, like changing colors; ideas 
presented at order placement or other curated lists or features; 
subscription and membership tiers; or chatbots.)

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    8. If you were trading or investing prior to using an online 
account, how have your investing and trading behaviors changed since 
you started using your online account? (For example, the amount of 
money you have invested, your interest in learning about investing 
and saving for retirement, the amount of time you have spent 
trading, your knowledge of financial products, the number of trades 
you have made, the amount of money you have made in trading, your 
knowledge of the markets, the number of different types of financial 
products you have traded, or your use of margin.)

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    9. How much experience do you have trading or investing in the 
following products (None, Less than 12 months, 1-2 years, 2-5 years, 
5+ years):

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                        Less than 12
                        Investment products                                None            months         1-2 years        2-5 years         5+ years
--------------------------------------------------------------------------------------------------------------------------------------------------------
Stocks.............................................................           [cir]            [cir]            [cir]            [cir]            [cir]
Bonds..............................................................           [cir]            [cir]            [cir]            [cir]            [cir]
Options............................................................           [cir]            [cir]            [cir]            [cir]            [cir]
Mutual Funds.......................................................           [cir]            [cir]            [cir]            [cir]            [cir]
ETFs...............................................................           [cir]            [cir]            [cir]            [cir]            [cir]
Futures............................................................           [cir]            [cir]            [cir]            [cir]            [cir]
Cryptocurrencies...................................................           [cir]            [cir]            [cir]            [cir]            [cir]
Commodities........................................................           [cir]            [cir]            [cir]            [cir]            [cir]
Closed-End Funds...................................................           [cir]            [cir]            [cir]            [cir]            [cir]
Money Market Funds.................................................           [cir]            [cir]            [cir]            [cir]            [cir]
Variable Insurance Products........................................           [cir]            [cir]            [cir]            [cir]            [cir]
Business Development Companies.....................................           [cir]            [cir]            [cir]            [cir]            [cir]
Unit Investment Trusts.............................................           [cir]            [cir]            [cir]            [cir]            [cir]
--------------------------------------------------------------------------------------------------------------------------------------------------------

    10. What is your understanding, if any, of the circumstances 
under which trading or investing in your account can be suspended or 
restricted?

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------------------------------------------------------------------------

    11. What else would you like us to know--positive or negative--
about your experience with online trading and investing?

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Other Ways to Submit Your Feedback

    You also can send us feedback in the following ways (include the 
file number S7-10-21 in your response):

Print Your Responses and Mail

Secretary
Securities and Exchange Commission
100 F Street NE
Washington, DC 20549-1090

Print a PDF of Your Responses and Email

Use the printer-friendly page and select a PDF printer to create a 
file you can email to: [email protected]

Print a Blank Copy of this Flyer, Fill it Out, and Mail

Secretary
Securities and Exchange Commission
100 F Street NE
Washington, DC 20549-1090

Contact Info (Not Required; to submit anonymously, leave blank)

First Name:------------------------------------------------------------
Last Name:-------------------------------------------------------------
    We will post your feedback on our website. Your submission will 
be posted without change; we do not redact or edit personal 
identifying information from submissions. You should only make 
submissions that you wish to make available publicly.

[[Page 49087]]

    If you are interested in more information on the proposal, or 
want to provide feedback on additional questions, click here. 
Comments should be received on or before October 1, 2021.
    Thank you!

[FR Doc. 2021-18901 Filed 8-31-21; 8:45 am]
BILLING CODE P