SEC targets conflicts in AI

The U.S. Securities and Exchange Commission (SEC) is proposing new rules to guard against conflicts of interest when investment firms use artificial intelligence, predictive analytics and other technologies in their dealings with retail investors.

The regulator proposed rules that would require broker-dealers and investment advisers to assess whether their use of certain technologies risks prioritizing their interests over their clients’ interests — and to avoid or ameliorate these kinds of conflicts.

“We live in an historic, transformational age with regard to predictive data analytics, and the use of artificial intelligence,” said SEC chair Gary Gensler in a release.

“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,” he said.

The SEC noted that while technologies that enable firms to optimize, predict or direct investor behaviours can benefit investors by improving market access, efficiency and returns, they also pose risks to investors by allowing firms to put their own interests ahead of their clients’ interests. And these risks are exacerbated by the scalability of these technologies.

To address these risks, the regulator is proposing rules that “[build] off existing legal standards” to require firms to determine whether their use of technologies in investor interactions involves a conflict of interest.

“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,” the SEC said.

Firms would also be required to have written policies and procedures to ensure compliance with the rules, and to keep records related to these requirements.

“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,” Gensler said.

The proposal will be out for comment for 60 days after it’s published in the Federal Register.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.