This week, the Securities and Exchange Commission (SEC) proposed new rules requiring broker-dealers and investment advisers to address conflicts of interest associated with their use of predictive data analytics and similar technologies to interact with investors. The proposed regulations are designed to prevent firms from placing their interests ahead of investors’ interests.
“We live in a historic, transformational age with regard to predictive data analytics and the use of artificial intelligence,” said SEC Chair Gary Gensler. “Today’s predictive data analytics models provide an increasing ability to make predictions about each of us.
“This raises possibilities that conflicts may arise to the extent that advisers or brokers are optimizing to place their interests ahead of their investors’ interests. When offering advice or recommendations, firms must eliminate or otherwise address any conflicts of interest and not put their interests ahead of their investors’ interests. I believe that, if adopted, these rules would help protect investors from conflicts of interest — and require that, regardless of the technology used, firms meet their obligations not to place their own interests ahead of investors’ interests.”
In an announcement, the SEC said the use by broker-dealers and investment advisers of technologies to “optimize for, predict, guide, forecast, or direct investment-related behaviors or outcomes” has surged. While they can help investors provide greater market access, efficiency, and returns, their misuse can give firms unfair advantages. Due to these technologies’ inherent scalability, the risk of rapid and widespread damage is high.
Building off existing legal standards, the proposed rules require a firm to evaluate and determine whether its use of certain technologies in investor interactions involves a conflict of interest that results in the firm’s interests being placed ahead of the investors’. Firms would be required to eliminate or neutralize the effect of any such conflicts.
However, they would be permitted to employ tools that they believe would address these risks and are specific to their technology, consistent with the proposal. These proposed rules also require a firm to have written policies and procedures reasonably designed to achieve compliance with the proposed regulations and to make and keep books and records related to these requirements.
The proposals will be published in the Federal Register. The public comment period will remain open until 60 days after publication.