In a world increasingly shaped by advanced technologies like predictive analytics and artificial intelligence, the Securities and Exchange Commission (SEC) is taking proactive steps to safeguard investor interests. The proposed “Predictive Analytics Rule” aims to address conflicts of interest that may arise from the use of predictive data analytics by investment advisers and broker-dealers during investor interactions.  

Key Updates and What They Mean for Registered Investment Advisers

Here’s a breakdown of the key updates and what they mean for RIA’s.

Introduction of Predictive Analytics Rule

The SEC proposed new rules called the “Predictive Analytics Rule” to tackle conflicts of interest arising from the use of predictive data analytics by investment advisers and broker-dealers in investor interactions.

The Importance of Predictive Analytics Rule

There are numerous risks associated with firms prioritizing their interests over those of investors through the use of advanced technologies like predictive analytics and artificial intelligence. These technologies, while capable of improving market access, efficiency, and returns when aligned with investor interests, can lead to significant harm if misused due to their ability to rapidly reach a wide audience. 

Applicability

The rule would apply to firms registered or required to be registered under the Investment Advisers Act of 1940 when they use or are likely to use certain predictive analytics technology during investor interactions.

Requirements for Firms

If adopted, the Predictive Analytics Rule would mandate that firms:

1. Evaluate Use of “Covered Technology”: Assess any current or foreseeable use of covered technology to identify conflicts of interest. Covered Technology includes processes that among other things, predicts investment-related behaviors or outcomes.
2. Determine Conflicts of Interest: Determine if these conflicts prioritize the firm’s or associated person’s interests over investors’.
3. Resolve Conflicts: Take steps to eliminate or neutralize conflicts that prioritize the firm’s interests over investors’.
4. Establish Written Policies and Procedures: Develop written policies and procedures aimed at compliance with the new rules. These should outline processes for evaluating technology use, identifying conflicts, and resolving them. There should also be provisions for periodic review of these policies and procedures.

Documentation

Maintain written records of the evaluation of covered technology use, determination of conflicts of interest, and steps taken to address them.

These rules aim to ensure that firms prioritize investors’ interests when using predictive analytics technology and have clear processes in place to address any conflicts of interest that may arise.

In conclusion, the proposed Predictive Analytics Rule represents a significant stride towards enhancing investor protection in an era defined by technological advancements. By mandating firms to prioritize investors’ interests and establish clear procedures for conflict resolution, the SEC aims to foster trust and integrity in the financial markets. As regulatory frameworks evolve to keep pace with technological innovation, investor confidence and market stability stand to benefit.