InfoBytes Blog
SEC proposes rules for addressing conflicts of interest raised by predictive data analytics
On July 26, the SEC issued proposed rules under the Securities Exchange Act of 1924 and the Investment Advisors Act of 1940 to address certain conflicts of interest associated with the use of predictive data analytics, including artificial intelligence (AI) and similar technologies, “that optimize for, predict, guide, forecast, or direct investment-related behaviors or outcomes.” The SEC explained that broker-dealers and investment advisors (collectively, “firms”) are increasingly using AI to improve efficiency and returns but cautioned that, due to the scalability of these technologies and the potential for firms to quickly reach a large audience, any resulting conflicts of interest could result in harm to investors that is more pronounced and on a broader scale than previously possible.
Based on existing legal standards, the proposed rules generally would require a firm to identify and eliminate, or neutralize, the effects of conflicts of interest that result in the firm’s (or associated persons) interests being placed ahead of investors’ interests. Firms, however, would be permitted to employ tools that they believe would address such risks and that are specific to the particular technology being used. Firms that use covered technology for investor interactions would also be required to have written policies and procedures in place to ensure compliance with the proposed rules, the SEC said. These policies and procedures must include a process for evaluating the use of covered technology in investor interactions and addressing any conflicts of interest that may arise. Firms must also maintain books and records related to these requirements. Comments on the proposed rules are due 60 days after publication in the Federal Register.