The SEC is proposing new rule amendments under Section 203 of the Investment Advisers Act of 1940 to eliminate, or neutralize the effect of, certain conflicts of interest when broker-dealers or investment advisers (collectively known as “firms”) interact with investors using covered technology. Covered technology refers to 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.
Firms have steadily increased their use of certain newer technologies (including predictive data analytics, artificial intelligence, or similar technologies), and when the use of these technologies is optimized for the sake of investors, it can enhance market access, efficiency, and returns. If a firm uses these advances in technologies to optimize in such a way that the firm’s interests are placed ahead of investors’ interests, investors may suffer harm. The proposed rule amendments would require particular protections to compliment current rules under existing regulatory structures designed to protect investors from harms that may arise from these conflicts.
Should the proposed rule amendments be adopted, they would require a firm to:
- address conflicts of interest related to its use of predictive data analytics and similar technologies to interact with investors to prevent firms from placing their interests ahead of investors’ interests
- achieve compliance with the proposed rules (in the case of broker-dealers). A firm that has any investor interaction using covered technology must have written policies and procedures reasonably designed to prevent violations of the proposed rules (in the case of investment advisers).
- make and maintain certain records in accordance with the proposed conflicts rules
Interested parties may submit feedback related to the rule proposal during the comment period that will remain open until 60 days following its publication in the Federal Register.
For detailed information, including instruction on how to submit comments, refer to the proposed rule, Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers, on the SEC’s website.
Source:
SEC Proposes New Requirements to Address Risks to Investors From Conflicts of Interest Associated With the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers (sec.gov)
