The Securities and Exchange Commission (SEC) proposed new rules and amendments to address certain conflicts of interest associated with the use of predictive data analytics by broker-dealers and investment advisers (“firms”) in investor interactions.

The proposal would require:

  • A firm to eliminate or neutralize the effect of conflicts of interest associated with the firm’s use of covered technologies in investor interactions that place the firm’s or its associated person’s interest ahead of investors’ interests;
  • A firm that has any investor interaction using covered technology to have written policies and procedures reasonably designed to prevent violations of (in the case of investment advisers) or achieve compliance with (in the case of broker-dealers) the proposed rules; and
  • Recordkeeping related to the proposed conflicts rules

“We live in an historic, transformational age with regard to predictive data analytics, and the use of artificial intelligence,” said SEC Chair Gary Gensler. 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 SEC’s plan is out for a 60-day comment period. At the time of this writing, several comments have trickled in – all of which seem to be in strong support of the proposal. While many are optimistic about what this could mean for the industry, there have been raised concerns over the expansive nature of the rule. Attorneys at Eversheds Sutherland have weighed in, stating that the rule would “paint in broad strokes” and apply to any “investor interaction” using certain “covered technologies.”

“Broker-dealers and investment advisers would now need to determine whether those interactions create certain conflicts of interest that would need to be eliminated or neutralized. This represents a significant expansion of the applicable standard of care and duties for financial services firms when interacting with investors, even potential investors,” stated the Legal Alert.

Although SEC staff has been clear that they do not view the rule proposal as “expanding” Reg BI, it would be impossible to argue that the rule proposal is not going to add an additional layer of regulation beyond Reg BI and the advisory fiduciary duty. While Reg BI and the fiduciary obligations of an adviser are centered on a broker-dealer’s recommendation of a security or investment strategy and an adviser’s provision of investment advice, the proposed rules would apply in the absence of a recommendation or the provision of investment advice. In fact, any engagement or communication with an investor via a “covered technology” would trigger the rule.

To read the complete rule proposal, click here.