Gensler said he’s asked staff for recommendations on enhanced reporting and disclosure through Form PF, which private fund advisors must file with the agency, or other reforms.
In separate comments during a recent conference, Gensler noted that the SEC oversees about 14,000 RIAs with more than 48 million clients and almost $112 trillion in regulatory assets under management.
“Within this field, there has been significant growth in the size and number of private funds, in particular private equity and venture capital funds,” he said. “The number of private equity funds has increased by 58% over the last five years; the number of VC funds, 110%.”
The asset management field, he continued, is growing and evolving.
“SEC staff are seeing new strategies, structures, and business practices,” Gensler reported. “Technology is rapidly changing. This trend not only creates new opportunities, but also risks for markets and investors.”
Regarding digital engagement practices, or DEPs, “asset managers — both incumbents and fintech startups — can tailor marketing and products to individual investors, using predictive data analytics and other DEPs,” Gensler stated.
In the case of robo-advisors or investment advisors, Gensler continued, “I wonder what they are doing within the predictive data analytics algorithms — if, statistically speaking, they are maximizing for our returns as investors, or, say, the revenues of the platforms. Further, to the extent that they’re maximizing revenues or doing a bit of both, how do we address the potential conflicts of interests that arise?”
Predictive Data Analytics
During the Oct. 5 oversight hearing held by the House Financial Services Committee, Gensler also reiterated his concerns about predictive data analytics and machine learning, which he said “are shaping and will continue to reshape many parts of our economy.”
Policymakers, he said, “must consider what rules of the road we need for modern capital markets and for the use of predictive data analytics. Today, trading platforms have new capabilities to tailor marketing and products to individual investors.
“While this can increase access and choice, such differential marketing and behavioral prompts raise new questions about potential conflicts within the brokerage, wealth management, and robo-advising spaces, particularly if and when brokerage or investment advisor models are optimized for the platform’s revenue and data collection.”
Gensler issued a request for comment Aug. 27 seeking information on broker-dealers and advisors’ digital engagement practices, including their use of apps with gaming features. The comment period expired last week.
Robinhood’s president, David Dusseault, told Gensler in his comment letter that an SEC attempt to regulate DEP would face legal hurdles.
“To be justified and lawful, any DEP rulemaking will need to address significant issues,” Dusseault wrote. Under the Administrative Procedures Act, “the SEC has a foundational duty of reasoned decisionmaking when it comes to rulemakings, particularly rulemakings addressing issues so consequential to retail investors. In order to conduct a proper rulemaking, the SEC will need to ‘examine the relevant data’ — including quantitative and qualitative evidence submitted — ‘and articulate a satisfactory explanation for its action including a ‘rational connection between the facts found and the choices made.’”
Sen. Pat Toomey, R-Pa., ranking minority member on the Senate Banking Committee, told Gensler in his comment letter to “proceed cautiously” and avoid imposing new regulations on digital trading apps that could restrict investor freedom.
“The federal securities laws do not authorize the SEC to act as a merit regulator and limit the choices of investors in the absence of fraudulent or manipulative conduct,” Toomey wrote. “Investors understand that there are consequences — whether they gain or lose — from their investment decisions. It is not the government’s role to tell retail investors what they can and cannot buy, including through indirect measures that restrict how brokers can interact with their customers on digital platforms.”