Concerns percolate about how SEC’s AI proposal aligns with Reg BI

investmentnews.com:

An SEC proposal to eliminate conflicts of interest in financial advisors’ use of technology that predicts investor behavior is raising concerns about how it will work with Regulation Best Interest.

A split Securities and Exchange Commission voted 3-2 Wednesday to release a proposal for public comment that would require brokerages and investment advisory firms to “eliminate or neutralize” conflicts related to conducting investor interactions through artificial intelligence, predictive data analytics and similar technology.

The proposal is designed to address situations where the technology places the firm’s or an advisor’s interests ahead of the interests of investors by optimizing client or customer behavior to purchase certain investments, deploy strategies or make other decisions.

The SEC implemented Regulation Best Interest in 2020 to raise the broker advice standard above the previous suitability standard. Under Reg BI, brokers are prohibited from putting their revenue interests ahead of their customers’ interests for high returns. Investment advisors also must act in their clients’ best interests.

But Reg BI says brokers must identify, eliminate or mitigate conflicts. The AI proposal calls for eliminating or neutralizing them. The difference means brokers may have to rethink how they identify and manage their conflicts, said Ben Marzouk, a partner at Eversheds Sutherland.

“Firms have spent years and millions of dollars complying with Reg BI,” Marzouk said. “Now there’s an additive requirement that is broader than Reg BI that covers all investor interactions. It’s not clear how this new requirement will interact with Reg BI.”

The techniques brokerages can use under Reg BI to address conflicts may not be available