SEC Investor Advocate Rick Fleming expressed concern that the use of digital engagement practices ("DEPs") blurs the distinction between solicited and unsolicited trading under Regulation Best Interest ("Reg BI").

At the Practising Law Institute's 2021 SEC Speaks program, Mr. Fleming emphasized that the 2019 adoption of Reg BI predated this new "gamification era," explaining that a broker-dealer who does not give a specific trading recommendation to a retail investor does not trigger the Reg BI standard of conduct obligations (i.e., a disclosure obligation, a care obligation, a conflict of interest obligation and a compliance obligation). Mr. Fleming argued that the future utility of Reg BI will depend on whether the SEC clarifies that a DEP used to "nudge" retail investors - regardless of whether the nudge is toward a specific security or generally used to increase the investor's trading activity - constitutes a "recommendation."

If the SEC cannot make such a clarification given the variety of existing DEPs, Mr. Fleming said, then the SEC should "go back to the drawing board" to address the downsides of a recommendation-specific rulemaking.

Mr. Fleming also questioned whether a clear enough distinction remains between an investment adviser and a broker-dealer to merit two distinct regulatory models. As more online discount brokers use DEPs to influence retail investors, Mr. Fleming called on the SEC to "brighten" the line between advisers and brokers.

Mr. Fleming acknowledged that positive developments in trading technology have made it possible for "younger and less experienced investors" to enter the securities markets, including investors from "disadvantaged communities."


A significant concern raised when Regulation Best Interest was first proposed was that the Regulation, if adopted, would kill full service brokerage as to retail investors. (See Cadwalader Memorandum Choose One: Best Interest or Full Service.) It appears likely that this is the direction toward which the markets are now heading - full steam - away from full service brokerage and toward discount firms that provide information through automation and do not purport to provide guidance.

Mr. Fleming appears to address the part of the issue that stems from the excessive burden the SEC has placed on full service brokerage by imposing equally stifling regulations on discount brokers. The fundamental problem with this solution is that there is no way that commission revenue generated by a true retail customer creates enough profits to sustain the regulatory obligation that Regulation Best Interest would impose on a broker subject to that rule with respect to that customer. In short, Reg. BI wounded full service brokerage; the SEC's Investor Advocate would do the same to discount brokers who provide information to their customers.

The bottom line is that while it is all very nice to speak of "fiduciary duty," if the government imposes obligations on a business that cannot remotely support the expense of those obligations, if the business does not comply, it dies. The loss of the discount brokers and the securities markets will be the gain of Reddit and the crypto markets. (See also Cadwalader Memorandum, GameStop: Regulators Should Focus Less on "Solving the Problem"; More on "Improving the Situation.")

Primary Sources

  1. SEC Speech, Rick Fleming: Investor Protection in the Age of Gamification: Game Over for Regulation Best Interest?

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