The Securities and Exchange Commission (SEC) has proposed new rules under 17 CFR Parts 240 and 275 that would require broker-dealers and investment advisers to take certain steps to address conflicts of interest associated with their use of predictive data analytics (PDA) and covered technologies to interact with investors.  A “covered technology” is 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.

The proposed rules would require firms to evaluate and determine whether their 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 firms to have policies and procedures in place to address PDA and covered technology.

The SEC is concerned that a firm might use these technologies when engaging or communicating with its investors to optimize the firm’s revenue or to generate behavioral prompts or social engineering to change investor behavior in a manner that benefits the firm but is to the detriment of the investor.

The SEC is particularly concerned about:

• Predictive Data Analytics (PDA) technologies where firms may not be aware of how the PDA technology it utilizes has reached a certain result or recommendation.
• The PDA used corrupted or mislabeled data, biased data or data from unknown sources.
• This technology could exponentially proliferate conflicts of interest with investors.

The SEC has therefore proposed rules intended to eliminate or neutralize the effects of these conflicts, rather than addressing the conflicts through disclosure and consent.

Under the proposed rules, firms would be required to:

• Evaluate any use or reasonably foreseeable potential use by the firm or its associated persons of a “covered technology” in any investor interaction; identify any conflicts of interest related to that use that place the firm’s interests ahead of that of the investors’; and eliminate or neutralize those conflicts’ effects.
• Adopt, implement and maintain written policies and procedures reasonably designed to prevent violations to achieve compliance with the proposed rules.
• Comply with certain record-keeping requirements related to the proposed rules.
• Require a firm to have written policies and procedures reasonably designed to achieve compliance with the proposed rules.

AI Ethics and Transparency at RegVerse

At RegVerse, we believe our utilization of AI aligns with the best interest of the investor. This is because we allow our users to streamline their day-to-day processes and focus more on providing value and benefits to the end clients. 

It is important to know that none of our systems make financial recommendations for internal use or for our client's utilization directly. Our AI technology is used to summarize large regulatory documents that are reviewed by compliance professionals internally before being distributed to our platform users. We also regularly review chatbot, responses, and train and retrain our data model as needed. This includes loading additional data to improve our data model and prevent model drift.

To be clear, we do not utilize AI algorithms or traditional technology for any investment decisions as we do not make or recommend any investment decisions to our users or their clients. We go to great lengths to ensure our AI Chatbot does not make investment decisions or recommendations to our users.  

We expect the SEC to finalize this new rule in the Spring of 2024 after they have received over 2,300 comments.  We will monitor developments and provide information and training as the rule becomes finalized with an implementation schedule.

References:

SEC.gov | SEC Proposes New Requirements to Address Risks to Investors From Conflicts of Interest Associated With the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers

Proposed Rule: Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers (sec.gov)

34-97990-fact-sheet.pdf (sec.gov)

SEC.gov | Statement on Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers Proposal

_{Additional Tags: SEC Proposed AI Rule, Artificial Intelligence, Compliance Automation, Covered Technology}