Evening Brief – 07.27.23
The Securities and Exchange Commission revealed new guidelines to address what it calls “risks to investors” posed by conflicts of interest linked with the use of predictive data analytics by broker-dealers and investment advisors, including artificial intelligence and machine learning.
Firms would have to review their use of “covered technology”, which the SEC defines as “a firm’s use of analytical, technological, or computational functions, algorithms, models, correlation matrices, or similar methods or processes.”
The proposed guidelines also require businesses to create risk management tools adapted to their specific technologies. In addition, they must keep detailed records of regulations and adopt written policies to assure compliance with the new standards.
“Today’s 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 advisors or brokers are optimizing to place their interests ahead of their investors’ interests,” said SEC chair Gary Gensler.
To address these risks, the regulator is proposing rules that “[build] off existing legal standards” to require firms to determine whether their use of technologies in investor interactions involves a conflict of interest.
The planned revisions are in part a reaction to the 2021 meme stocks hype, which gained traction among investors through social media platforms such as Reddit. Brokers and robo-advisors, according to officials, “used AI and game-like features to drive user behavior.”
Along with the conflict-of-interest proposal, the SEC has also proposed amendments to modernize the regulations for investment advisors offering services exclusively online. As per the proposed changes, regulated parties using the Internet advisor registration rule must maintain an operational interactive website and provide ongoing digital advisory services to multiple clients.
The proposals will be out for comment for 60 days before the five-member SEC panel votes on the reforms.