Attention FAE Customers:
Please be aware that NASBA credits are awarded based on whether the events are webcast or in-person, as well as on the number of CPE credits.
Please check the event registration page to see if NASBA credits are being awarded for the programs you select.

SEC Proposes New Rules for Use of Predictive Data Analytics by Brokerages and Advisers

S.J. Steinhardt
Published Date:
Jul 27, 2023

The Securities and Exchange Commission (SEC) has proposed new rules that would govern how broker-dealers and investment advisers use predictive data analytics and similar technologies to interact with investors.

The proposed rules would prevent firms from placing their interests ahead of investors’ interests by requiring them to identify any potential conflicts of interest emerging from their use of artificial intelligence (AI) and then eliminate them. Firms would also have to maintain written policies, procedures and record-keeping to prevent violations.

“Today’s predictive data analytics models provide an increasing ability to make predictions about each of us as individuals," said SEC Chair Gary 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—and require that, regardless of the technology used, firms meet their obligations not to place their own interests ahead of investors’ interests.”

The proposed rule goes further than the existing one for investment advisers, which provides that they must recommend decisions in their clients’ best interests only, according to the The Washington Post. It would extend the ban on conflicts of interest for online platforms to include features that use individuals’ data to try to direct their behavior.

“The SEC’s proposal would turn back the clock, bringing U.S. financial markets to the old, manual days when retail investors were forced to interact with their broker or adviser by phone or at a branch office,” said Steve Quirk, chief brokerage officer of online brokerage Robinhood, in an interview with the Post. “This isn’t in anybody’s best interest, least of all the new generation of retail investors.”

The SEC’s two Republican commissioners, Mark Uyeda and Hester M. Peirce, also objected to the proposal. Peirce said that it “reflects this Commission’s loss of faith in one of the pillars of our regulatory infrastructure: the power of disclosure and the corresponding belief that informed investors are able to think for themselves.”

Click here to see more of the latest news from the NYSSCPA.