On July 26, 2023, the Securities and Exchange Commission (SEC) proposed new rules which aim to address conflicts of interest related to the use predictive data analytics and similar technologies by broker-dealers and investment advisers. The objective is to ensure that these firms prioritize investors’ interests and prevent them from putting their own interests first.
“We live in an 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 as individuals. 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 are obligated to eliminate or otherwise address any conflicts of interest and not put their own 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.”
The SEC noted that while the use of predictive analytics has significant potential benefits, if used inappropriately, it can also lead to significant investor harm. In their proposal the SEC identifies “covered technologies” as a firm’s use of analytical, technological, or computational functions, algorithms, models, correlation matrices, or similar methods or processes that optimize for, predict, guide, forecast, or direct investment-related behaviors or outcomes of an investor.”
Should the proposed rules be adopted in full, the SEC would require:
- A firm to eliminate or neutralize the effect of conflicts of interest associated with the firm’s use of covered technologies in investor interactions that place the firm’s or its associated person’s interest ahead of investors’ interests;
- A firm that has any investor interaction using covered technology to have written policies and procedures reasonably designed to prevent violations of (in the case of investment advisers) or achieve compliance with (in the case of broker-dealers) the proposed rules; and
- Recordkeeping related to the proposed conflicts rules.
The comment period for this proposal will remain open for 60 days after publication within the Federal Register.
Have questions? Contact a compliance expert to learn more about the impact of proposed and adopted regulations.