SEC Proposes New Rules Concerning Investment Adviser and Broker-Dealer Use of Predictive Data Analytics

Who may be interested: Broker-Dealers, Investment Advisers

Quick Take: The SEC recently proposed new rules and amendments that seek to address conflicts of interest stemming from investment advisers’ and broker-dealers’ use of so-called predictive data analytics and similar technologies in interactions with investors.

The proposed rules would apply to a firm’s use of 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 (Covered Technology) in specific types of interactions with investors. Covered investor interactions would include engagements or communications with investors, including by exercising discretion with respect to an investor’s account, providing information to an investor or soliciting an investor. 

The proposed rules would require firms to: (i) evaluate any use, or reasonably foreseeable potential use, of a Covered Technology in an investor interaction to identify any conflict of interest associated with that use or potential use; (ii) determine whether a conflict of interest places, or results in placing, the firm’s or an associated person’s interest ahead of the interest of investors; and (iii) eliminate, or neutralize the effect of, those conflicts of interest. Under the proposed rules, a conflict of interest exists if the technology takes into account an interest of the firm, or a natural person associated with the firm.

Firms would have to adopt, implement and maintain written policies and procedures designed to ensure compliance with the rule, and document the process for evaluating technologies and assessing conflicts.

Comments on the proposed rules are due within 60 days of the publication of the proposing release in the Federal Register.

The proposed rules can be found here.