SEC proposed rules address predictive data analytics use

The Securities and Exchange Commission (SEC) is proposing new rules requiring broker-dealers and investment advisers to address potential conflicts of interest associated with predictive data analytics use.

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The proposed guidance also includes similar technologies amid broker-dealers and investment advisers’ interaction with investors, preventing firms from placing their interests ahead of investors’ interests.

“We live in an historic, transformational age with regard to predictive data analytics, and the use of artificial intelligence,” SEC Chair Gary Gensler said. “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.”

Gensler maintains if adopted, the rules would help protect investors from conflicts of interest.

The proposed rules would 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 investors’ interests.

Additionally, the SEC indicated the proposed rules would require firms to eliminate, or neutralize the effect of, any such conflicts, but firms would be permitted to employ tools that they believe would address these risks and that are specific to the particular technology they use, consistent with the proposal.

The SEC indicated the proposing release would be published in the Federal Register, with the public comment period remaining open until 60 days after the date of publication of the proposing release in the Federal Register.