The Securities and Exchange Commission proposed requiring broker-dealers and investment advisers to address possible conflicts of interest related to the use of predictive data analytics and similar technologies. The SEC proposal would prevent firms from prioritizing their interests over those of investors.
“Today’s predictive data analytics models provide an increasing ability to make predictions about each of us as individuals," SEC Chair Gary Gensler said in a July 26 news release. "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.”
Although technologies optimizing for, predicting, or guiding investment-related behaviors can offer benefits such as improved market access and efficiency, they can also cause financial harm to investors if used in ways that favor the firms' interests, the release reported. The agency emphasized the widespread use of such technologies, and the potential to reach a broad audience quickly could amplify conflicts of interest, resulting in more significant harm to investors than previously possible.
Based on existing legal standards, the proposed rules require firms to assess whether their use of specific technologies in investor interactions creates conflicts of interest that put investors' interests behind their own. Firms would be obliged to eliminate or neutralize any such conflicts and would be allowed to implement customized tools that they believe effectively address these risks, aligning with the proposal, the release reported.
The SEC proposals would also mandate firms to maintain written policies and procedures aimed at complying with the regulations and to keep records associated with these requirements, according to the release.
The SEC will publish the proposal in the Federal Register to allow for a public comment period lasting 60 days from the date of publication, during which stakeholders can provide feedback on the proposed rules, the release reported.
Gensler said firms are obligated to eliminate or mitigate conflicts of interest when offering advice and recommendations, and he believes the proposals would protect investors, "regardless of the technology used," the release said.
“We live in an historic, transformational age with regard to predictive data analytics and the use of artificial intelligence,” Gensler said in the release.
