The US Securities and Exchange Commission (SEC) is set to introduce rules requiring broker-dealers and investment advisers to address conflicts of interest that may arise from their use of predictive data analytics and similar technologies. This is an effort to ensure the protection of investors, preventing firms from prioritizing their own interests over those of investors.
In a separate update also published yesterday (Wednesday), the SEC proposed amendments that would modernize regulations for investment advisers offering their services exclusively through the Internet. These changes are aimed at maintaining operational interactive websites.
SEC Wants to Bridge the Gap between Technology and Investor Interests
The rate at which broker-dealers and investment advisers utilize technologies to predict and guide investment-related behaviour has been accelerating significantly. These technologies can benefit investors by offering enhanced market access, efficiency, and returns.
However, financial harm can ensue when firms use these technologies and put their interests before those of investors. Given these technologies' broad reach and rapid scalability , any resulting conflict could potentially inflict more significant and widespread harm to investors than before.
Under the proposed rules, firms must identify and evaluate whether using specific technologies in interacting with investors results in a conflict of interest. Should such a conflict be identified, firms must eliminate or mitigate its effect.
Gary Gensler, the Chairman of the SEC, commented on the transformative potential of predictive data analytics and artificial intelligence (AI) in the present age. According to Gensler, the proposed rules would safeguard investors from conflicts between technology and investors' best interest, regardless of the tools employed by the firms.
"I believe that, if adopted, these rules would help protect investors from conflicts of interest," Gensler commented.
The regulations would allow firms to use specific tools to manage risks tailored to their particular technology. Additionally, firms would need to establish written policies and procedures to comply with the new rules and keep comprehensive records of these regulations.
The most recent data shows that many financial firms are using AI solutions for their benefit. What is more, three out of four traders consider ChatGPT a trusted source for financial advice.
SEC Proposes Modernized Regulations for Internet-Based Investment Advisers
The SEC also published a separate statement regarding investment advisers operating exclusively online. The new amendments proposed by the regulator would necessitate regulated parties who are utilizing the Internet adviser registration rule to maintain an operational interactive website.
Through this website, they must provide ongoing digital investment advisory services to multiple clients. In addition, the proposed changes would eliminate the 'de minimis exception' from the current rule. This would mean that an internet investment adviser must advise all clients exclusively through an operational interactive website.
According to Gensler, a lot has changed since 2002, when the SEC granted a narrow exception for internet-based advisers to register with the commission instead of the US.
"A lot has changed in the 21 years since, and I believe an exemption written in 2002 allows gaps in 2023. Thus, today's proposal would modernize the internet advisers exemption to better align registration requirements with modern technology and help the commission in the efficient and effective oversight of registered investment advisers," Gensler added.
Both proposals are now open for public comment for 60 days following their publication in the Federal Register.
