On July 26, 2023, the Securities and Exchange Commission (SEC) announced its proposed rules targeted at eliminating potential conflicts of interest among broker-dealers and investment advisors in their interactions with investors through the use of predictive data analytics (PDA) or artificial intelligence (AI). These rules fall under the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. This information was reported by Kramer Levin Naftalis & Frankel LLP.
The broad scope of these proposals reflects the SEC’s transition into an increasingly digitized age, as the growing role of AI and analytics technology in various market operations prompts regulatory bodies worldwide to respond.
These proposed rules emerge amid growing recognition of the potential conflicts that could arise when broker-dealers and advisers leverage these sophisticated technologies to interact with investors. Specifically, these conflicts could relate to making investment decisions, providing advice, executing transactions, or any other actions undertaken on behalf of investors.
While the full text of the proposed regulations is yet to be published, the SEC’s move reveals their ongoing efforts to closely monitor new technological developments and ensure transparency and fairness in the investment industry, particularly concerning the use of AI and analytics.
This represents an increasingly critical area for corporations and law firms to monitor, particularly those with heavy investment activity, as these regulatory changes could necessitate significant adjustments to their current AI and PDA-utilizing practices.
As the SEC continues to further detail its proposed rules, investment management professionals should keep abreast of these developments to understand their potential impacts and plan their compliance strategies accordingly.