SEC proposal would require brokers, advisors to remediate conflicts related to use of AI
Brokers and investment advisors would have to remediate conflicts of interest related to interactions with investors conducted through artificial intelligence, predictive analytics and similar technology under a proposal released Wednesday by the SEC.
By a 3-2 vote, the Securities and Exchange Commission approved releasing a 243-page proposal for public comment that would require brokerages and investment advisory firms to review their use of a “covered technology” and determine whether its algorithms optimize the interests of the firm or its financial advisors over the interests of investors.
Firms would have to “eliminate or neutralize” conflicts, according to an SEC fact sheet. They also would have to implement related policies, procedures and record keeping.
A covered technology “includes a firm’s use of analytical, technological, or computational functions, algorithms, models, correlation matrices, or similar methods or processes that optimize for, predict, guide, forecast, or direct investment-related behaviors or outcomes of an investor,’ the SEC fact sheet states.
Predictive analytics enable brokerages and advisory firms to nudge investors based on their individual characteristics to behave in certain ways related to product offerings and pricing.
Such “narrowcasting” can benefit clients or customers if it results in a unique investment approach that works particularly well for them, but it also can raise harmful conflicts, SEC Chair Gary Gensler said.
“If the robo advisor or brokerage app is using a function to optimize for its own interests and not solely for yours as an investor, therein lies a conflict,” Gensler said at an SEC open meeting. “Investors deserve to be protected from
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