1) Aug 9 -- The Securities and Exchange Commission (“Commission” or “SEC”) is proposing new rules (“proposed conflicts rules”) under the Securities Exchange Act of 1934 (“Exchange Act”) and the Investment Advisers Act of 1940 (“Advisers Act”) to eliminate, or neutralize the effect of, certain conflicts of interest associated with broker-dealers' or investment advisers' interactions with investors through these firms' use of technologies that optimize for, predict, guide, forecast, or direct investment-related behaviors or outcomes. The Commission is also proposing amendments to rules under the Exchange Act and Advisers Act that would require firms to make and maintain certain records in accordance with the proposed conflicts rules. Comments should be received on or before October 10, 2023.
The adoption and use of newer technologies, such as predictive data analytics (“PDA”), by broker-dealers and investment advisers (together, “firms”) have accelerated. In some instances, firms' use of PDA and similar technologies may be subject to statutory or regulatory investor protections, but in other cases, it may not. Firms' use of PDA-like technologies can bring benefits in market access, efficiency, and returns. To the extent that firms are using PDA-like technologies to optimize for their own interests in a manner (intentionally or unintentionally) that places these interests ahead of investor interests, however, investors can suffer harm. Further, due to the scalability of these technologies and the potential for firms to reach a broad audience at a rapid speed, as discussed below, any resulting conflicts of interest could cause harm to investors in a more pronounced fashion and on a broader scale than previously possible.
We believe the current regulatory framework should be updated to help ensure that firms are appropriately addressing conflicts of interests associated with the use of PDA-like technologies. As a result, we are proposing specific protections to complement those already required under existing regulatory frameworks to better protect investors from harms arising from these conflicts. . . .
In view of Commission staff observations, our experience administering our existing rules, the discussion in section 1.B. above on the development of PDA-like technologies in firm investor interactions and the unique risks they raise regarding conflicts of interest, and comments received in response to the Request, we are proposing to update the regulatory framework to help ensure that firms are appropriately addressing conflicts of interest associated with the use of PDA-like technologies. Specifically, we propose that firms should be required to identify and eliminate, or neutralize the effect of, certain conflicts of interest associated with their use of PDA-like technologies because the effects of these conflicts of interest are contrary to the public interest and the protection of investors.
Proposed rules 15l–2 under the Exchange Act (17 CFR 240.15l–2) and 211(h)(2)–4 under the Advisers Act (17 CFR 275.211(h)(2)–4) (collectively, the “proposed conflicts rules”) are designed to address the conflicts of interest associated with firms' use of PDA-like technology when engaging in certain investor interactions, and the proposed rules would do so in a way that aligns with (and in some respects may satisfy) firms' existing regulatory obligations. Except as specifically noted, the texts of proposed conflicts rule applicable to brokers and dealers (17 CFR 240.15l–2) and the proposed conflicts rule applicable to investment advisers (17 CFR 275.211(h)(2)–4) would be substantially identical. The proposed conflicts rules would only apply where the firm uses defined covered technology—more specifically, an analytical, technological, or computational function, algorithm, model, correlation matrix, or similar method or process that optimizes for, predicts, guides, forecasts, or directs investment-related behaviors or outcomes in an investor interaction.
The proposal is designed to be sufficiently broad and principles-based to continue to be applicable as technology develops and to provide firms with flexibility to develop approaches to their use of technology consistent with their business model, subject to the over-arching requirement that they need to be sufficient to prevent the firm from placing its interests ahead of investor interests. The proposal is also designed to be consistent with the Commission's prior actions regarding technological innovation. We note that the staff has also provided their views on the industry's expanding use of technology in the context of robo-advisers and shared examination findings and risks associated with the use of robo-advisory products, among other areas.
The proposal draws upon our authority under section 211(h) of the Advisers Act and section 15(l) of the Exchange Act. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) added section 211(h)(2) to the Advisers Act and section 15(l)(2) to the Exchange Act, each of which, among other things, authorizes the Commission to “promulgate rules prohibiting or restricting certain sales practices, conflicts of interest, and compensation schemes for brokers, dealers, and investment advisers that the Commission deems contrary to the public interest and the protection of investors.”
The proposal is intended to be technology neutral. We are not seeking to identify which technologies a firm should or should not use. Rather, the proposal builds off existing legal standards and, as discussed throughout the release, is designed to address certain risks to investors associated with firms' use of certain technology in their interactions with investors, regardless of which such technology is used. The proposal also is designed to permit firms the ability to employ tools that they believe would address these risks that are specific to the particular technology they use consistent with the proposal. The Commission has long acted to protect investors from the harms arising from conflicts of interests and will continually assess the harms and revise those protections in light of the evolution of practices, including with regard to firms' use of technologies. As discussed in further detail below, conflicts associated with the use of PDA-like technologies should be eliminated or their effects neutralized to protect investors from conflicts of interest associated with firms' use of PDA-like technologies that results in investor interactions that place the interests of the firm and its associated persons ahead of investors' interests.
In particular, the proposed conflicts rules would generally require the following: . . .
2) July 26 [press release] -- The Securities and Exchange Commission today proposed new rules that would require broker-dealers and investment advisers (collectively, “firms”) 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.
“We live in an historic, transformational age with regard to predictive data analytics, and the use of artificial intelligence,” said SEC Chair Gary Gensler. “Today’s predictive data analytics models provide an increasing ability to make predictions about each of us as individuals. This raises possibilities that conflicts may arise to the extent that advisers or brokers are optimizing to place their interests ahead of their investors’ interests. When offering advice or recommendations, firms are obligated to eliminate or otherwise address any conflicts of interest and not put their own interests ahead of their investors’ interests. 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 use by broker-dealers and investment advisers of technologies to optimize for, predict, guide, forecast, or direct investment-related behaviors or outcomes has accelerated. Use of such technologies can be beneficial to investors in providing greater market access, efficiency, and returns. To the extent that firms are using certain technologies in a manner that places their own interests ahead of investors’ interests, however, investors can suffer financial harm. Given the scalability of these technologies and the potential for firms to reach a broad audience at a rapid speed, any resulting conflicts of interest could cause harm to investors in a more pronounced fashion and on a broader scale than previously possible.
Building off existing legal standards, the proposed rules generally would require a firm 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. Firms would be required to eliminate, or neutralize the effect of, any such conflicts, but firms would be permitted to employ tools that they believe would address these risks and that are specific to the particular technology they use, consistent with the proposal. The proposed rules would also require a firm to have written policies and procedures reasonably designed to achieve compliance with the proposed rules and to make and keep books and records related to these requirements.
Fact Sheet: https://www.sec.gov/files/34-97990-fact-sheet.pdf
Press release: https://www.sec.gov/news/press-release/2023-140