SEC Fears AI Could Ignite Conflict of Interest

SEC Fears AI Could Ignite Conflict of Interest

Time Stamp: July 27, 2023 3:34 AM
Source Node: 2787277

The US Securities
and Exchange Commission (SEC) is set to introduce rules requiring
broker-dealers and investment advisers to address conflicts of interest that
may arise from their use of predictive data analytics and similar technologies.
This is an effort to ensure the protection of investors, preventing firms from
prioritizing their interests over those of investors.

In a separate
update also published yesterday (Wednesday), SEC proposed amendments that would
modernize regulations for investment advisers offering their services
exclusively through the Internet. These changes are aimed at maintaining
operational interactive websites.

The rate at
which broker-dealers and investment advisers utilize technologies to predict
and guide investment-related behaviors has been significantly accelerating.
These technologies can benefit investors by offering enhanced market access,
efficiency, and returns.

However, financial
harm can ensue when firms use these technologies to put their interests before
those of investors. Given these technologies’ broad reach and rapid scalability ,
any resulting conflicts could potentially inflict more significant and
widespread harm to investors than before.

Under the
proposed rules, firms must identify and evaluate whether using specific
technologies in interacting with investors results in a conflict of interest.
Should such a conflict be identified, firms must eliminate or mitigate its
effect.

Gary
Gensler, the Chairman of SEC, commented on the transformative potential of
predictive data analytics and artificial intelligence (AI) in the present age. According
to Gensler, the proposed rules would safeguard investors from conflicts between
technology and investors’ best interest, regardless of the tools employed by
the firms.

“I
believe that, if adopted, these rules would help protect investors from
conflicts of interest,” Gensler commented.

The
regulations would allow firms to use specific tools to manage risks tailored to
their particular technology. Additionally, firms would need to establish
written policies and procedures to comply with the new rules and keep
comprehensive records of these regulations. SEC Proposes Modernized Regulations
for Internet-Based Investment Advisers.

The most recent data shows that many financial firms are using AI solutions for their benefit. What is more,

three out of four traders consider ChatGPT a trusted source
for financial advice.

SEC Proposes Modernized
Regulations for Internet-Based Investment Advisers

SEC also
published a separate statement regarding investment advisers operating exclusively
online. The new amendments proposed by the regulator would necessitate regulated
parties who are utilizing the Internet adviser registration rule to maintain an
operational interactive website.

Through
this website, they must provide ongoing digital investment advisory services to
multiple clients. In addition, the proposed changes would eliminate the ‘de
minimis exception’ from the current rule. This would mean that an internet
investment adviser must advise all clients exclusively through an operational
interactive website.

According
to Gensler, a lot has changed since 2002, when the SEC granted a narrow
exception for internet-based advisers to register with the commission instead
of the US.

“A lot
has changed in the 21 years since, and I believe an exemption written in 2002
allows gaps in 2023. Thus, today’s proposal would modernize the internet
advisers exemption to better align registration requirements with modern
technology and help the commission in the efficient and effective oversight of
registered investment advisers,” Gensler added.

Both proposals
are now open for public comment for 60 days following their publication in the
Federal Register.

The US Securities
and Exchange Commission (SEC) is set to introduce rules requiring
broker-dealers and investment advisers to address conflicts of interest that
may arise from their use of predictive data analytics and similar technologies.
This is an effort to ensure the protection of investors, preventing firms from
prioritizing their interests over those of investors.

In a separate
update also published yesterday (Wednesday), SEC proposed amendments that would
modernize regulations for investment advisers offering their services
exclusively through the Internet. These changes are aimed at maintaining
operational interactive websites.

The rate at
which broker-dealers and investment advisers utilize technologies to predict
and guide investment-related behaviors has been significantly accelerating.
These technologies can benefit investors by offering enhanced market access,
efficiency, and returns.

However, financial
harm can ensue when firms use these technologies to put their interests before
those of investors. Given these technologies’ broad reach and rapid scalability ,
any resulting conflicts could potentially inflict more significant and
widespread harm to investors than before.

Under the
proposed rules, firms must identify and evaluate whether using specific
technologies in interacting with investors results in a conflict of interest.
Should such a conflict be identified, firms must eliminate or mitigate its
effect.

Gary
Gensler, the Chairman of SEC, commented on the transformative potential of
predictive data analytics and artificial intelligence (AI) in the present age. According
to Gensler, the proposed rules would safeguard investors from conflicts between
technology and investors’ best interest, regardless of the tools employed by
the firms.

“I
believe that, if adopted, these rules would help protect investors from
conflicts of interest,” Gensler commented.

The
regulations would allow firms to use specific tools to manage risks tailored to
their particular technology. Additionally, firms would need to establish
written policies and procedures to comply with the new rules and keep
comprehensive records of these regulations. SEC Proposes Modernized Regulations
for Internet-Based Investment Advisers.

The most recent data shows that many financial firms are using AI solutions for their benefit. What is more,

three out of four traders consider ChatGPT a trusted source
for financial advice.

SEC Proposes Modernized
Regulations for Internet-Based Investment Advisers

SEC also
published a separate statement regarding investment advisers operating exclusively
online. The new amendments proposed by the regulator would necessitate regulated
parties who are utilizing the Internet adviser registration rule to maintain an
operational interactive website.

Through
this website, they must provide ongoing digital investment advisory services to
multiple clients. In addition, the proposed changes would eliminate the ‘de
minimis exception’ from the current rule. This would mean that an internet
investment adviser must advise all clients exclusively through an operational
interactive website.

According
to Gensler, a lot has changed since 2002, when the SEC granted a narrow
exception for internet-based advisers to register with the commission instead
of the US.

“A lot
has changed in the 21 years since, and I believe an exemption written in 2002
allows gaps in 2023. Thus, today’s proposal would modernize the internet
advisers exemption to better align registration requirements with modern
technology and help the commission in the efficient and effective oversight of
registered investment advisers,” Gensler added.

Both proposals
are now open for public comment for 60 days following their publication in the
Federal Register.

Time Stamp:

More from Finance Magnates