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Proposed SEC Rules on Predictive Data Analytics for Dealer-Brokers and Investment Advisors

Regulation | Aug 1, 2023

SEC Regulation - Proposed SEC Rules on Predictive Data Analytics for Dealer-Brokers and Investment Advisors

The Securities and Exchange Commission (SEC) has recently proposed new rules that would require broker-dealers and investment advisers (collectively referred to as "firms") to address conflicts of interest associated with their use of predictive data analytics and similar technologies.

Motivation for Proposing the Rules

The SEC's motivation for proposing these rules stems from the rapid advancement and adoption of predictive data analytics and artificial intelligence in the financial industry. SEC Chair Gary Gensler emphasized the transformational nature of these technologies and their ability to make individualized predictions.

However, the SEC has identified potential conflicts that may arise when advisers or brokers optimize their interests ahead of their investors'. The use of such technologies can be beneficial, providing greater market access, efficiency, and returns. But if misused, investors can suffer financial harm, especially given the scalability of these technologies and the potential for firms to reach a broad audience rapidly.

Newly Proposed Rules

The proposed rules focus on the use of predictive data analytics and artificial intelligence by firms to interact with investors. The main provisions of the rules include:

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  1. Conflict of Interest Assessment: Firms must evaluate whether their use of certain technologies in investor interactions involves a conflict of interest that places the firm's interests ahead of investors' interests.
  2. Elimination or Neutralization of Conflicts: If conflicts are identified, firms must eliminate or neutralize the effect of such conflicts. They may employ tools specific to the technology they use, consistent with the proposal.
  3. Written Policies and Procedures: Firms must have written policies and procedures designed to achieve compliance with the proposed rules.
  4. Record Keeping: Firms are required to make and keep books and records related to these requirements.

Implications and Next Steps

The proposed rules signify a significant step in regulating the use of emerging technologies in the financial sector:

  1. Enhanced Investor Protection: By addressing conflicts of interest, the rules aim to protect investors from potential financial harm.
  2. Increased Compliance Burden: Firms will need to invest in compliance tools and procedures to adhere to the new rules.
  3. Potential Impact on Innovation: While the rules aim to protect investors, they may also influence how firms approach the development and deployment of predictive analytics and AI technologies.

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The proposing release will be published in the Federal Register, and the public comment period will remain open for 60 days after the date of publication. This period will allow stakeholders to provide feedback and insights into the proposed rules.

Conclusion

The SEC's proposed rules on predictive data analytics reflect a proactive approach to regulating emerging technologies in the financial sector. By addressing potential conflicts of interest, the rules aim to ensure that firms do not place their interests ahead of investors'. While the rules represent a move towards greater investor protection, they also raise questions about compliance burdens and potential impacts on innovation. The public comment period will be a crucial phase in shaping the final rules, and all stakeholders are encouraged to participate.


NCFA Jan 2018 resize - Proposed SEC Rules on Predictive Data Analytics for Dealer-Brokers and Investment AdvisorsThe National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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