SEC ACTS TO PREVENT CONFLICTS OF INTEREST WHEN ADVISERS OR BROKERS USE PREDICTIVE ANALYSIS TO SELECT PROFITABLE INVESTMENTS

The SEC proposes new rules on reducing the chances for conflict of interest when advisers and brokers use predictive analysis or A.I. programs as a basis for choosing profitable investments. Here's what a recent SEC news release says about the proposed rule:

FOR IMMEDIATE RELEASE
2023-140

Washington D.C., July 26, 2023 —

The Securities and Exchange Commission today proposed new rules that would require broker-dealers and investment advisers (collectively, “firms”) to take certain steps to address conflicts of interest associated with their use of predictive data analytics and similar technologies to interact with investors to prevent firms from placing their interests ahead of investors’ interests. . . . 

The use by broker-dealers and investment advisers of technologies to optimize for, predict, guide, forecast, or direct investment-related behaviors or outcomes has accelerated. Use of such technologies can be beneficial to investors in providing greater market access, efficiency, and returns. To the extent that firms are using certain technologies in a manner that places their own interests ahead of investors’ interests, however, investors can suffer financial harm. Given the scalability of these technologies and the potential for firms to reach a broad audience at a rapid speed, any resulting conflicts of interest could cause harm to investors in a more pronounced fashion and on a broader scale than previously possible.

Building off existing legal standards, the proposed rules generally would require a firm to evaluate and determine whether its use of certain technologies in investor interactions involves a conflict of interest that results in the firm’s interests being placed ahead of investors’ interests. 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, consistent with the proposal. The proposed rules would also require a firm to have written policies and procedures reasonably designed to achieve compliance with the proposed rules and to make and keep books and records related to these requirements.

NASAA in its new Series 66 Test Specifications covers Conflicts of Interest in Section IV (H) (4) (4.1-4.13). 

Bob Eder in his Study for the Series 66 Exam discusses Conflicts of Interest in detail in Chapter 16, Ethical Practices/Fiduciary Obligations.

Here is the link to NASAA's Test Specifications for the Series 66 Exam. 

Study for the Series 66 Exam is available from Amazon in both paperback and Kindle e-book versions. Here is the link to Bob Eder's Series 66 book on Amazon.

For questions about Bob Eder's Series 66 Manual, Study for the Series 66 Exam, or questions in general about the Series 66 Exam, or about Conflicts of Interest, feel free to email Bob Eder at bobeder@bobeder.net.

Bob Eder received his Juris Doctor (J.D.) degree from the University of Utah, Quinney College of Law, in 2001. See Bob Eder's Author Page on Amazon.com.