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SEC proposes new rules to address conflicts of interest involving use of AI

On Behalf of | Aug 7, 2023 | Financial News

The Securities and Exchange Commission is proposing new rules regarding the use of predictive data analytics and artificial intelligence to interact with investors, InvestmentNews reports.

Specifically, the rules would require broker-dealers and investment advisers to take certain steps to address conflicts of interest associated with their use of these technologies in order to prevent firms from placing their interests ahead of investors’ interests.

Under the proposal, which was approved by a 3-2 vote, firms would have to review their use of “covered technologies”, which were defined as “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 would have to determine whether its use of these technologies in investor interactions involves any conflict of interest and eliminate or neutralize the effect of any such conflicts.

SEC Chair Gary Gensler pointed out the need for these new rules given the accelerating use of predictive data analytics, artificial intelligence, or similar technologies to interact with investors.

“Today’s predictive data analytics models provide an increasing ability to make predictions about each of us as individuals,” said Gensler. “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.”

The SEC would also require a firm to have written policies and procedures reasonably designed to achieve compliance with the proposed rules and to make and keep books and records related to these requirements.

The proposal will be open for public comment for 60 days after it is published in the Federal Register.

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