The Securities and Exchange Commission has proposed a new rule that requires advisors and broker-dealers to mitigate potential conflicts of interest when they use artificial intelligence to “nudge” investors into making investment decisions.
Under an SEC plan released yesterday, firms would need “to address conflicts of interest associated with their use of predictive data analytics and similar technologies to interact with investors to prevent firms from placing their interests ahead of investors’ interests.”
SEC Chairman Gary Gensler said in a prepared statement that with firms accelerating the use of data analytics models “to provide an increasing ability to make predictions about each of us as individuals that can result in nudges ... this also raises the possibilities that conflicts may arise to the extent that advisers or brokers are optimizing to place their interests ahead of their investors’ interests.
“If a firm’s optimization function takes the interest of the firm into consideration ... this can lead to conflicts of interest. What’s more, such conflicts could manifest efficiently at scale across brokers’ and advisers’ interactions with their entire investor bases,” Gensler said.
If passed, the rule would require firms to eliminate or neutralize conflicts in technologies “that place a firm’s or its associated persons interests ahead of investors,” the SEC said in the rule.
Firms would also need to establish written policies and procedures to prevent violations and maintain records related to proposed conflicts.
Critics, however, say the proposal duplicates the mandates of existing SEC regulations, including sweeping Regulation Best Interest and fiduciary rules, which already require broker-dealers and RIAs to put investors’ interests before their own.
Gail Bernstein, general counsel of the Investment Adviser Association, said she is “deeply concerned about the proposed rules.”
They “continue a troubling pattern of not identifying and supporting with data the need for a new regulation and seeming to dismiss existing regulatory obligations that already govern the conduct the proposal is trying to address,” she said.
This proposal is also “another example of the commission’s moving away from the principles-based regulatory framework for advisers—which includes their overarching fiduciary duty—towards more prescriptive and rigid requirements that will likely result in advisers’ judgments being second guessed in hindsight,” Bernstein said in a prepared statement.