U.S. SEC: Broker-Dealers and Investment Advisers Required to Address Conflict-of-Interest Risks to Investors Posed by Technology

The U.S. Securities and Exchange Commission (U.S. SEC) issued new rules requiring broker-dealers and investment advisers to take certain steps to address conflicts of interest related to predictive data analytics or similar technologies in their dealings with investors, preventing firms from placing their own interests ahead of the interests of investors, according to a Wednesday announcement from the regulator.

SEC Chairman Gary Gensler believes that today's predictive data analytics models are getting better and can make predictions about every indiciduals, but that also raises the potential for conflicts of interest.

When advising investors, firms have an obligation to eliminate and resolve all conflicts of interest and should not prioritize their own interests over those of investors.

Gensler said, "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 Commission said that broker-dealers and investment advisers are increasingly using technology to optimize, predict, or guide investment behavior or outcomes. These technologies provide a number of benefits to investors, but if firms fail to meet their obligations and prioritize investor interests, then investors are likely to suffer financial losses due to conflicts of interest. Moreover, such losses have a much larger and broader impact.

Therefore, the SEC has proposed new regulations based on the existing legal basis, requiring companies to assess and confirm whether the technology they use in dealing with investors may lead to conflicts of interest. Companies have an obligation to eliminate or neutralize the effects of such conflicts and may use tools that they believe address the risks.

The proposed new rules also require firms to have written policies and procedures reasonably designed to comply with the regulations, and also to make and keep relevant books and records.