SEC Proposes New Requirements to Address Risks to Investors From Conflicts of Interest Associated With the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers; Comments Due October 10
Published July 28, 2023
The Securities and Exchange Commission (SEC) issued a proposed rule that would require broker-dealers and investment advisers to take certain steps 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.
The use of technologies to optimize for, predict, guide, forecast, or direct investment-related behaviors or outcomes has accelerated and can be beneficial to investors in providing greater market access, efficiency, and returns. Under the proposed rules, a firm would be required to evaluate and determine whether its use of certain technologies in investor interactions involves a conflict of interest that results in the firm’s interests being placed ahead of investors’ interests. More specifically, 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 or achieve compliance with the proposed rules; and
- the maintenance of recordkeeping related to the proposed conflicts rules.
In addition, the SEC released a second proposed rule, titled "Exemption for Certain Investment Advisers Operating Through the Internet". The proposal is designed to modernize conditions to account for the evolution in technology.
Lastly, the SEC adopted rules requiring registrants to disclose material cybersecurity incidents they experience and to disclose on an annual basis material information regarding their cybersecurity risk management, strategy, and governance.
Comments are due October 10, 2023.
Additional Guidance
News Release on Conflicts of Interest for Broker-Dealers and Investment Advisors
News Release on Investment Advisers Operating Through the Internet
News Release on Cybersecurity Risk Management