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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 275

[Release Nos. 34-97990; IA-6353; File No. S7-12-23]

RIN 3235-AN00; 3235-AN14

Conflicts of Interest Associated with the Use of Predictive Data Analytics by BrokerDealers and Investment Advisers

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

SUMMARY: The Securities and Exchange Commission (“Commission” or “SEC”) is proposing

new rules (“proposed conflicts rules”) under the Securities Exchange Act of 1934 (“Exchange

Act”) and the Investment Advisers Act of 1940 (“Advisers Act”) to eliminate, or neutralize the

effect of, certain conflicts of interest associated with broker-dealers’ or investment advisers’

interactions with investors through these firms’ use of technologies that optimize for, predict,

guide, forecast, or direct investment-related behaviors or outcomes. The Commission is also

proposing amendments to rules under the Exchange Act and Advisers Act that would require

firms to make and maintain certain records in accordance with the proposed conflicts rules.

DATES: Comments should be received on or before October 10, 2023.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments:

•

Use the Commission’s internet comment form

(https://www.sec.gov/rules/proposed.shtml); or

•

Send an email to rule-comments@sec.gov. Please include File Number S7-12-23 on the

subject line.

Paper Comments:

•

Send paper comments to Vanessa A. Countryman, Secretary, Securities and Exchange

Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-12-23. This file number should be

included on the subject line if email is used. To help the Commission process and review your

comments more efficiently, please use only one method of submission. The Commission will

post all comments on the Commission’s website (https://www.sec.gov/rules/proposed.shtml).

Comments are also available for website viewing and printing in the Commission’s Public

Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between

the hours of 10 a.m. and 3 p.m. Operating conditions may limit access to the Commission’s

Public Reference Room. Do not include personal identifiable information in submissions; you

should submit only information that you wish to make available publicly. We may redact in part

or withhold entirely from publication submitted material that is obscene or subject to copyright

protection.

Studies, memoranda, or other substantive items may be added by the Commission or staff

to the comment file during this rulemaking. A notification of the inclusion in the comment file of

any such materials will be made available on the Commission’s website. To ensure direct

electronic receipt of such notifications, sign up through the “Stay Connected” option at

www.sec.gov to receive notifications by email.

A summary of the proposal of not more than 100 words is posted on the Commission’s

website (https://www.sec.gov/rules/2023/07/s7-12-23#34-97990).

FOR FURTHER INFORMATION CONTACT: Blair B. Burnett, Senior Counsel, Investment

Company Regulation Office, Michael Schrader, Senior Counsel, Chief Counsel’s Office, Sirimal

R. Mukerjee, Senior Special Counsel, and Melissa Roverts Harke, Assistant Director, Investment

Adviser Regulation Office, Division of Investment Management, at (202) 551-6787 or

IArules@sec.gov, and Kyra Grundeman and James Wintering, Special Counsels, Anand Das,

Senior Special Counsel, Kelly Shoop, Branch Chief, Devin Ryan, Assistant Director, John

Fahey, Deputy Chief Counsel, and Emily Westerberg Russell, Chief Counsel, Office of Chief

Counsel, Division of Trading and Markets, at (202)-551-5550 or tradingandmarkets@sec.gov,

Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Commission is proposing for public comment:

17 CFR 240.15l-2 under the Exchange Act1 (“proposed rule 240.15l-2”) and 17 CFR

275.211(h)(2)-4 under the Advisers Act2 (“proposed rule 275.211(h)(2)-4” and, together with

proposed rule 240.15l-2, “proposed conflicts rules”); and amendments to 17 CFR 240.17a-3 and

17 CFR 240.17a-4 (“rules 17a-3 and 17a-4”) under the Exchange Act and 17 CFR 275.204-2

under the Advisers Act (“rule 204-2” and, together with the proposed amendments to rules 17a-3

and 17a-4, “proposed recordkeeping amendments”).

Unless otherwise noted, when we refer to the Exchange Act, we are referring to 15 U.S.C. 78, and when we

refer to rules under the Exchange Act, we are referring to title 17, part 240 of the Code of Federal

Regulations [17 CFR 240].

Unless otherwise noted, when we refer to the Advisers Act, we are referring to 15 U.S.C. 80b, and when we

refer to rules under the Advisers Act, we are referring to title 17, part 275 of the Code of Federal

Regulations [17 CFR 275].

Table of Contents

I. Introduction ................................................................................................................ 6

A. Overview ................................................................................................................. 7

B. Background ........................................................................................................... 12

1. Evolution in the Investment Industry and its Technology Use ....................... 12

2. Current PDA-Like Technology Use and Expected Growth ........................... 15

3. Commission Protection of Investors as Technology Has Evolved ................. 21

4. Use of Predictive Data Technologies in Investor Interactions ........................ 27

5. Request for Information and Comment .......................................................... 33

C. Overview of the Proposal...................................................................................... 37

II. Discussion .................................................................................................................. 42

A. Proposed Conflicts Rules ...................................................................................... 42

1. Scope ............................................................................................................... 42

2. Identification, Determination, and Elimination, or Neutralization of the Effect

of, a Conflict of Interest .................................................................................. 60

3. Policies and Procedures Requirement ........................................................... 112

B. Proposed Recordkeeping Amendments .............................................................. 135

III. Economic Analysis .................................................................................................. 142

A. Introduction ......................................................................................................... 142

B. Broad Economic Considerations......................................................................... 144

C. Economic Baseline.............................................................................................. 151

1. Affected Parties ............................................................................................. 151

2. Technology and Market Practices ................................................................. 155

3. Regulatory Baseline ...................................................................................... 158

D. Benefits and Costs............................................................................................... 168

1. Benefits ......................................................................................................... 171

2. Costs.............................................................................................................. 182

E. Effects on Efficiency, Competition, and Capital Formation............................... 191

1. Efficiency ...................................................................................................... 191

2. Competition................................................................................................... 193

3. Capital Formation ......................................................................................... 194

F. Reasonable Alternatives...................................................................................... 195

1. Expressly permit, or require, the use of independent third-party analyses. .. 195

2. Require that senior firm personnel and/or specific technology subject-matter

experts participate in the process of adopting and implementing these policies

and procedures. ............................................................................................. 196

3. Provide an exclusion for technologies that consider large datasets where firms

have no reason to believe the dataset favors the interests of the firm from the

identification, evaluation, and testing requirements. .................................... 197

4. Apply the requirements of the proposed conflicts rule and proposed

recordkeeping amendments only to broker-dealer use of covered technologies

that have non-recommendation investor interaction. .................................... 198

5. Require that firms test covered technologies on an annual basis, or at a

specific minimum frequency......................................................................... 199

6. Require that firms provide a prescribed and standardized disclosure. .......... 200

G. Request for Comment ......................................................................................... 202

IV. Paperwork Reduction Act...................................................................................... 205

A. Introduction ......................................................................................................... 205

B. Proposed Conflicts Rules and Proposed Recordkeeping Amendments .............. 207

C. Request for Comment ......................................................................................... 212

V. Initial Regulatory Flexibility Analysis .................................................................. 213

A. Reason For and Objectives of the Proposed Action ........................................... 213

1. Proposed Rules 15l-2 and 211(h)(2)-4 .......................................................... 213

2. Proposed Amendments to Rules 17a-3 and 17a-4 and Rule 204-2 .............. 215

B. Legal Basis .......................................................................................................... 216

C. Small Entities Subject to the Rules and Rule Amendments ............................... 217

1. Small Advisers Subject to Proposed Rule 211(h)(2)-4 and Proposed

Amendments to Recordkeeping Rule ........................................................... 217

D. Small Broker-Dealers Subject to Proposed Conflicts Rule and Amendments to

Recordkeeping Rules .......................................................................................... 218

E. Projected Reporting, Recordkeeping, and Other Compliance Requirements ..... 218

1. Proposed Conflicts Rules .............................................................................. 219

2. Proposed Amendments to Rule 204-2 .......................................................... 220

3. Proposed Amendments to Rules 17a-3 and 17a-4 ........................................ 221

F. Duplicative, Overlapping, or Conflicting Federal Rules .................................... 222

1. Proposed Rule 211(h)(2)-4 and Proposed Amendments to Rule 204-2 ....... 222

2. Proposed rule 15l-2 and proposed amendments to rules 17a-3 and 17a-4 ... 224

G. Significant Alternatives ...................................................................................... 225

H. Solicitation of Comments ................................................................................... 227

VI. Consideration of Impact on The Economy........................................................... 228

Statutory Authority ......................................................................................................... 228

Text of Proposed Rules and Form Amendments ............................................................ 229

INTRODUCTION

The adoption and use of newer technologies, such as predictive data analytics (“PDA”),

by broker-dealers and investment advisers (together, “firms”) have accelerated.3 In some

instances, firms’ use of PDA and similar technologies may be subject to statutory or regulatory

investor protections, but in other cases, it may not. Firms’ use of PDA-like technologies can

bring benefits in market access, efficiency, and returns. To the extent that firms are using PDAlike technologies to optimize for their own interests in a manner (intentionally or unintentionally)

that places these interests ahead of investor interests, however, investors can suffer harm.

Further, due to the scalability of these technologies and the potential for firms to reach a broad

audience at a rapid speed, as discussed below, any resulting conflicts of interest could cause

harm to investors in a more pronounced fashion and on a broader scale than previously possible.4

We believe the current regulatory framework should be updated to help ensure that firms

are appropriately addressing conflicts of interests associated with the use of PDA-like

technologies. As a result, we are proposing specific protections to complement those already

See Deloitte, Artificial intelligence: The next frontier for investment management firms (Feb. 5, 2019),

https://www.deloitte.com/global/en/Industries/financial-services/perspectives/ai-next-frontier-ininvestment-management.html (“AI is providing new opportunities which extend far beyond cost reduction

and efficient operations. Many investment management firms have taken note and are actively testing the

waters, applying cognitive technologies and AI to various business functions across the industry value

chain.”); Blake Schmidt and Amanda Albright, AI Is Coming for Wealth Management. Here’s What That

Means, Bloomberg Markets (Apr. 21, 2023), https://www.bloomberg.com/news/articles/2023-0421/vanguard-fidelity-experts-explain-how-ai-is-changing-wealth-management (discussing experts views on

AI impact on the wealth management industry). As discussed more below, in addition to PDA, firms have

adopted and used artificial intelligence (“AI”), including machine learning, deep learning, neural networks,

natural language processing (“NLP”), or large language models (including generative pre-trained

transformers or “GPT”), as well as other technologies that make use of historical or real-time data, lookup

tables, or correlation matrices (collectively, “PDA-like technologies”). See, e.g., Q. Zhu and J. Luo,

Generative Pre-Trained Transformer for Design Concept Generation: An Exploration, Proceedings of the

Design Society, Design Vol 2 (May 2022), https://www.cambridge.org/core/journals/proceedings-of-thedesign-society/article/generative-pretrained-transformer-for-design-concept-generation-anexploration/41894D82DCBC0610B5B6E68967B7047F (“GPT are language models pre-trained on vast

quantities of textual data and can perform a wide range of language-related tasks.”) (citations omitted).

See infra section I.C.

required under existing regulatory frameworks5 to better protect investors from harms arising

from these conflicts.

Overview

Broker-dealers may have a range of conflicts of interest with their retail investors.6

Likewise, investment advisers may have conflicts of interest with respect to advisory clients and

investors in their pooled investment vehicle clients.7 Some of these conflicts of interest are

inherent to the relationship between these firms and investors. For example, an investment

adviser that is paid a percentage fee based on assets under management has an incentive to

encourage a client to move assets into his or her advisory account, which could conflict with

investors’ interest, for example, to retain assets in a 401(k) plan or other retirement account.

Similarly, a broker-dealer that receives transaction-based (e.g., commission) compensation has

an incentive to maximize the frequency of transactions, which could increase costs to the

investor or expose them to other risks associated with excess trading.

Many broker-dealers and investment advisers also have conflicts of interest associated

with other common business practices. For example, some investment product sponsors offer

revenue sharing payments, creating an incentive for broker-dealers and investment advisers that

accept such payments to favor those investments. Similarly, firms that offer proprietary products

have an incentive to favor those products over other non-proprietary alternatives. Dual registrant

See infra section III.C.3

While the proposed conflicts rules do not use or define the term “retail investors,” we use that term in this

release to mean “a natural person, or the legal representative of such natural person, who seeks to receive or

receives services primarily for personal, family or household purposes,” which is consistent with the

definition of “retail investor” in Form CRS and would include both current and prospective retail

customers. See Form CRS, Sec. 11.E. Separately, we note that, for broker-dealers, the proposed conflicts

rule defines “investor” consistent with the definition of “retail investor” in Form CRS.

Proposed rule 275.211(h)(2)-4 would apply to clients and prospective clients of advisers as well as

investors and prospective investors in pooled investment vehicles advised by those advisers.

and affiliated firms that offer both brokerage and advisory accounts have an incentive to steer

investors toward the account type that is most profitable for the firm, regardless of whether it is

in the best interest of the investor. Unless adequately addressed, these conflicts of interest can

cause broker-dealers and investment advisers to place their interests ahead of investors’ interests.

Broker-dealers and investment advisers operate within regulatory frameworks that in

many cases require them to, as applicable, disclose, mitigate, or eliminate conflicts.8 These

regulatory frameworks play a fundamental role in protecting retail investors of broker-dealers,

clients of investment advisers, and investors in pooled investment vehicle clients of investment

advisers (together, “investors”) from the negative effects of firms placing their own interests

ahead of investors’ interests. As the markets grow and evolve, however, and specifically, as

firms adopt and utilize newer technologies to interact with investors, we are evaluating our

regulations’ effectiveness in protecting investors from the potentially harmful impact of conflicts

of interest.

See https://www.sec.gov/rules/final/2019/34-86031.pdf, Exchange Act Release No. 86031 (June 5, 2019)

[84 FR 33318 (July 12, 2019)] (“Reg BI Adopting Release”); Commission Interpretation Regarding

Standard of Conduct for Investment Advisers, Advisers Act Release No. 5248 (June 5, 2019) [84 FR 33669

(July 12, 2019)], at section II.C. (“Fiduciary Interpretation”) (describing an adviser’s fiduciary duties to its

clients). Additionally, rule 206(4)-8 under the Advisers Act prohibits certain statements, omissions, and

other acts, practices, or courses of business as fraudulent, deceptive, or manipulative with respect to any

investor or prospective investor in a pooled investment vehicle.

Recently, firms’ adoption and use of PDA-like technologies9 have accelerated.10 While

this adoption and use can bring potential benefits for firms and investors (e.g., with respect to

efficiency of operations, which can generate cost savings for investors, or enhancing the

efficiency of identifying investment opportunities that match an investor’s preferences, profile,

and risk tolerances), they also raise the potential for conflicts of interest associated with the use

of these technologies to cause harm to investors more broadly than before.11

While the presence of conflicts of interest between firms and investors is not new, firms’

increasing use of these PDA-like technologies in investor interactions may expose investors to

unique risks. This includes the risk of conflicts remaining unidentified and therefore unaddressed

or identified and unaddressed. The effects of such unaddressed conflicts may be pernicious,

particularly as this technology can rapidly transmit or scale conflicted actions across a firm’s

Artificial intelligence is generally used to mean the capability of a machine to imitate intelligent human

behavior and machine learning is a subfield of artificial intelligence that gives computers the ability to learn

without explicitly being programmed. See generally Sara Brown, Machine Learning, Explained, MIT Sloan

School of Management (Apr. 21, 2021), https://mitsloan.mit.edu/ideas-made-to-matter/machine-learningexplained. Predictive data analytics draws inferences from large data sets, relying on hypothesis-free data

mining and inductive reasoning to uncover patterns to make predictions about future outcomes, and may

use natural language processing, signal processing, topic modeling, pattern recognition, machine learning,

deep learning, neural networks, and other advanced statistical methods. See Nathan Cortez, Predictive

Analytics Law and Policy: Mapping the Terrain: Challenging Issues in Specific Private Sector Contexts,

Substantiating Big Data in Health Care, 14 ISJLP 61, 65 (Fall 2017). See generally Financial Industry

Regulatory Authority, Inc. (“FINRA”), Artificial Intelligence (AI) in the Securities Industry 5 (June 2020)

(“FINRA AI Report”), https://www.finra.org/sites/default/files/2020-06/ai-report-061020.pdf; Financial

Stability Board, Artificial Intelligence and Machine Learning in Financial Services: Market Developments

and Financial Stability Implications (Nov. 1, 2017) (“FSB AI Report”), https://www.fsb.org/wpcontent/uploads/P011117.pdf; see also Department of the Treasury, et al., Request for Information and

Comment on Financial Institutions’ Use of Artificial Intelligence, Including Machine Learning (Feb. 2021)

[86 FR 16837, 16839-40 (Mar. 31, 2021)] (“Treasury RFI”).

See infra section I.B.

See, e.g., For AI in Asset Management, Tomorrow is Here, Markets Media (Mar. 28, 2023),

https://www.marketsmedia.com/for-ai-in-asset-management-tomorrow-is-here/ (citing possible benefits for

investment managers in generating alpha, improving efficiency, enhancing product and content

distribution, and enhancing risk management and customer experience); Christine Schmid, AI in Wealth:

from Science Fiction to Science Fact, FinExtra (June 8, 2023),

https://www.finextra.com/blogposting/24323/ai-in-wealth-from-science-fiction-to-science-fact (citing

potential benefits in personalized portfolio creation, enhanced investor engagement, democratized

personalized investing, and reduced information overload).

investor base.12 For example, conflicts of interest can arise from the data the technology uses

(including any investor data) and the inferences the technology makes (including in analyzing

that data, other data, securities, or other assets). These issues may render a firm’s identification

of such conflicts for purposes of the firm’s compliance with applicable Federal securities laws

more challenging without specific efforts both to fully understand the PDA-like technology it is

using13 and to oversee conflicts that are created by or transmitted through its use of such

technology.14

Moreover, PDA-like technologies may have the capacity to process data, scale outcomes

from analysis of data, and evolve at rapid rates.15 While valuable in many circumstances, these

technologies could rapidly and exponentially scale the transmission of any conflicts of interest

See, e.g., Sophia Duffy and Steve Parrish, You Say Fiduciary, I Say Binary: A Review and

Recommendation of Robo-Advisors and the Fiduciary and Best Interest Standards, 17 HASTINGS BUS. L.J.

3, at 26 (2021) (stating that the impact of firm conflicts of robo-advisors “are arguably more detrimental

than personal conflicts between an advisor and client because the number of clients impacted by the firm

conflict is potentially exponentially higher.”) (“Robo-Advisors and the Fiduciary and Best Interest

Standards”).

See, e.g., infra section II.A.2.b and II.A.3 (discussing the testing and policies and procedures requirements,

respectively, of the proposed conflicts rules, which if implemented in accordance with the proposal, would

necessitate firms’ developing an understanding of the PDA-like technologies they use).

See, e.g., Sohnke M. Bartram, Jurgen Branke & Mehrshad Motahari, Artificial Intelligence in Asset

Management (2020) (“AI in Asset Management”) (“Understanding and explaining the inferences made by

most AI models is difficult, if not impossible. As the complexity of the task or the algorithm grows, opacity

can render human supervision ineffective, thereby becoming an even more significant problem.”).

See, e.g., Eray Elicik, Artificial Intelligence vs. Human Intelligence: Can a game-changing technology play

the game? (Apr. 20, 2022), https://dataconomy.com/2022/04/is-artificial-intelligence-better-than-humanintelligence/ (“Compared to the human brain, machine learning (ML) can process more data and do so at a

faster rate.”); David Nield, Google Engineers ‘Mutate’ AI to Make It Evolve Systems Faster Than We Can

Code Them (Apr. 17, 2020), https://www.sciencealert.com/coders-mutate-ai-systems-to-make-themevolve-faster-than-we-can-program-them (“[R]esearchers have tweaked [a machine learning system] to

incorporate concepts of Darwinian evolution and shown it can build AI programs that continue to improve

upon themselves faster than they would if humans were doing the coding.”).

associated with such technologies to investors.16 For example, a firm may use PDA-like

technologies to automatically develop advice and recommendations that are then transmitted to

investors through the firm’s chatbot, push notifications on its mobile trading application (“app”),

and robo-advisory platform. If the advice or recommendation transmitted is tainted by a conflict

of interest because the algorithm drifted17 to advising or recommending investments more

profitable to the firm or because the dataset underlying the algorithm was biased toward

investments more profitable to the firm, the transmission of this conflicted advice and

recommendations could spread rapidly to many investors.

Unless adequately addressed, the use of these PDA-like technologies may create or

transmit conflicts of interest that place a firm’s interests ahead of investors’ interests. This may

arise not only when a firm is providing investment advice or recommendations, but also in the

firm’s sales practices and investor interactions more generally, such as design elements, features,

or communications that nudge or prompt more immediate and less informed action by the

investor.18 In light of these developments and risks, and for the reasons we describe further

below, we are proposing that a firm’s use of certain PDA-like technologies in an investor

See Robo-Advisors and the Fiduciary and Best Interest Standards, supra note 12, at 26. See also FINRA AI

Report, supra note 9 (discussing exploration of the use of AI tools by market participants and noting,

among other things, that firms should ensure sound governance and supervision, including effective means

of overseeing suitability of recommendations, conflicts of interest, customer risk profiles and portfolio

rebalancing) (internal quotations and citation omitted); Y. Minsky, Communications of the ACM, OCaml

for the Masses (Sept. 27, 2011), https://dl.acm.org/doi/pdf/10.1145/2018396.2018413 (explaining that

“technology carries risk. There is no faster way for a trading firm to destroy itself than to deploy a piece of

trading software that makes a bad decision over and over in a tight loop” and that the author’s employer

seeks to control these risks by “put[ting] a very strong focus on building software that was easily

understood—software that was readable.”).

See infra note 157 and accompanying text.

See, e.g., CFA Institute, Ethics and Artificial Intelligence in Investment Management: A Framework for

Professionals (2022) (stating that professionals should ensure they understand the sources of any potential

conflicts generated by the use of algorithms and work with developers to ensure that such systems do not

inappropriately incorporate fee considerations in the algorithm generating the investment advice).

interaction that places the firm’s interests ahead of the investors’ interests involves a conflict of

interest that must be eliminated or its effects neutralized in accordance with the proposed

conflicts rules.

Background

Evolution in the Investment Industry and its Technology Use

Over the last several decades, firms’ use of technology to interact with investors and

provide products and services has evolved significantly, and with it, the nature and extent of the

conflicts of interest this use can create. When Congress first enacted the Exchange Act and the

Advisers Act, firms were increasingly deploying what were then considered advanced

technologies, such as punch cards and telex machines. As technology improved, firms began

adopting other technologies, such as computers, email, spreadsheets, and the internet. The

Commission has previously observed that these and other technologies have helped to promote

transparency, liquidity, and efficiency in our capital markets.19 If responsibly implemented and

overseen by firms, new technologies can aid firms’ interactions with investors, and bring greater

access and product choice, potentially at a lower cost, without compromising investor protection,

capital formation, and fair, orderly, and efficient markets.

Where once investors placed trades with their broker in-person, they eventually began to

place orders over the phone, and then through a website. Now investors can instantaneously

place a trade directly through an app on a smart phone and, instead of a recommendation

delivered by a human, they may receive push notifications potentially designed to affect trading

See Interpretation on Use of Electronic Media, Investment Company Act Release No. 24426 (Apr. 28,

2000) [65 FR 25843 (May 4, 2000)], at section I; see also Investment Adviser Marketing, Investment

Advisers Act No. 5653 (Dec. 22, 2020) [86 FR 13024 (Mar. 5, 2021)], at section I (“Investment Adviser

Marketing Release”) (noting that the rules are “designed to accommodate the continual evolution and

interplay of technology and advice”).

behavior. These technological interactions can be designed to respond to human behavior, for

example, sending increased notifications for certain investment products depending on where the

person scrolling through investment products pauses on her smartphone. As technology

continues to evolve, we believe that firms are likely to increase their reliance on behavioral

science frameworks in influencing investor behavior.20 Investors that previously met in person

with their advisers are now able to access computer-generated advice that is delivered rapidly in

an app to many investors by, for example, a robo-adviser. Rather than advertising in local

newspapers, making cold calls, or relying on referrals, firms are now digitally targeting

investors.21

See, e.g., Robert W. Cook, President and CEO of FINRA, Statement Before the Financial Services

Committee U.S. House of Representatives (May 6, 2021), https://www.finra.org/media-center/speechestestimony/statement-financial-services-committee-us-house-representatives (addressing the “recent trends

of retail trading platforms is the use of ‘game-like’ and other features that may encourage investor

behaviors” and “the growing prevalence of these features”); Margaret Franklin, Investment Gamification:

Not All Cons, Some Important Pros, Kiplinger (Feb. 20, 2023),

https://www.kiplinger.com/investing/investment-gamification-pros-and-cons (discussing the use of

behavioral techniques and the rising influence of social media, and stating that the gamification “style of

trading, ushered in largely by the next generation of investors, is likely here to stay.”). See also James

Tierney, Investment Games, 72 DUKE L.J. 353, 355 (Nov. 2022) (describing the growth of retail investing

and discussing gamification, including how “mobile app developers have innovated in user-interface design

to compete with incumbent brokers [by including features such as] intuitive and appealing design, as well

as digital engagement practices that encourage interaction with the app and that shape the information users

consider in investing,”); Jill E. Fisch, GameStop and the Reemergence of the Retail Investor, 102 B.U. L.

REV. 1799, 1802 (Oct. 2022) (discussing gamification and the “evidence that retail investment and

engagement will both continue and evolve.”); Ernst & Young, Social investing: behavioral insights for the

modern wealth manager (Apr. 2021), https://www.ey.com/en_us/wealth-asset-management/socialinvesting-behavioral-insights-for-the-modern-wealth-manager (“As firms continue to develop social

investing operating models, they can use behavioral science frameworks to better understand how their

client segments are influenced by digital design and choice architecture[.]”).

See, e.g., Disclosure Innovations in Advertising and Other Communications with the Public, FINRA

Regulatory Notice 19-31 (Sept. 19, 2019), https://www.finra.org/rules-guidance/notices/19-31; see also

Leslie K. John, Tami Kim, and Kate Barasz, Ads that Don’t Overstep, HARVARD BUS. REV. (Jan.- Feb.

2018), https://hbr.org/2018/01/ads-that-dont-overstep.

In recent years, we have observed a rapid expansion in firms’ reliance on technology and

technology-based products and services.22 The use of technology is now central to how firms

provide their products and services to investors.23 Some firms and investors in financial markets

now use new technologies such as AI, machine learning, NLP, and chatbot technologies to make

investment decisions and communicate between firms and investors.24 In addition, existing

technologies for data-analytics and data collection continue to improve and find new

applications.25

See generally Marc Andreessen, Why Software Is Eating the World, Wall St. J. (Aug. 20, 2011),

http://www.wsj.com/articles/SB10001424053111903480904576512250915629460 (discussing, among

other things, the transformation of the financial services industry by software over the last 30 years) (“Why

Software is Eating the World”); Robo-Advisors and the Fiduciary and Best Interest Standards, supra note

12, at 4 (stating that “[o]ver the past decade, robo-advisors, or automated systems for providing financial

advice and services, are becoming more and more popular” and discussing estimated growth); Nicole G.

Iannarone, Fintech’s Promises and Perils Computer as Confidant: Digital Investment Advice and the

Fiduciary Standard, 93 Chi.-Kent L. Rev. 141, 141 (2018) (“Automated investment advisers permeate the

investment industry. Digital investment advisers are the fastest growing segment of financial technology

(FinTech) and are disrupting traditional investment advisory delivery models.”) (citations omitted).

See, e.g., Investment Adviser Marketing Release, supra note 19, at section I (“The concerns that motivated

the Commission to adopt the advertising and solicitation rules [in 1961 and 1979, respectively] still exist

today, but investment adviser marketing has evolved with advances in technology. In the decades since the

adoption of both the advertising and solicitation rules, the use of the internet, mobile applications, and

social media has become an integral part of business communications. Consumers today often rely on these

forms of communication to obtain information, including reviews and referrals, when considering buying

goods and services. Advisers and third parties also rely on these same types of outlets to attract and refer

potential customers.”); FINRA Investor Education Foundation, Investors in the United States: The

Changing Landscape (Dec. 2022) https://www.finrafoundation.org/sites/finrafoundation/files/NFCSInvestor-Report-Changing-Landscape.pdf (discussing, among others, website and mobile app use for

placing trades and use of social media sites for obtaining investment information).

Michael Kearns & Yuriy Nevmyvaka Machine Learning for Market Microstructure and High Frequency

Trading, HIGH FREQUENCY TRADING - NEW REALITIES FOR TRADERS, MARKETS AND REGULATORS (David

Easley, Marcos Lopez de Prado & Maureen O’Hara editors, Risk Books, 2013); see also Christian Thier &

Daniel dos Santos Monteiro, How Much Artificial Intelligence Do Robo-Advisors Really Use? (Aug. 31,

2022), https://ssrn.com/abstract=4218181; Imani Moise, Bond Investing Gets the Robo-Adviser Treatment,

THE WALL STREET JOURNAL (June 7, 2023), https://www.wsj.com/articles/buying-bonds-is-hard-heres-away-to-let-a-robot-do-it-70a4587b.

Natasha Lekh & Petr Pátek, What’s the Future of Web Scraping in 2023?, APIFY BLOG (Jan. 20, 2023),

https://blog.apify.com/future-of-web-scraping-in-2023/; Jon Martindale, Best Apps to Use GPT-4,

DIGITALTRENDS (May 4, 2023), https://www.digitaltrends.com/computing/best-apps-to-use-gpt-4/.

Current PDA-Like Technology Use and Expected Growth

Financial market participants currently use AI and machine learning technologies in a

variety of ways. For example, algorithmic trading is a widely used application of machine

learning in finance, where machine-learning models analyze large datasets and identify patterns

and signals to optimize for, predict, guide, forecast, or direct investment-related behaviors or

outcomes.26 Moreover, the advent and growth of services available on certain digital platforms,

such as those offered by online brokerages and robo-advisers, have multiplied the opportunities

for retail investors, in particular, to invest and trade in securities, and in small amounts through

fractional shares.27 This increased accessibility has been one of the key factors associated with

the increase of retail investor participation in U.S. securities markets in recent years.28 Firms

See generally Alessio Azzutti, Wolf-Goerge Ringe, H. Siegfried Stiehl, Machine Learning, Market

Manipulation, and Collusion on Capital Markets: Why the “Black Box” Matters, 43 U. PA. J. INT’L L. 1

(2021), https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=2035&context=jil (“Machine

Learning and Market Manipulation”) (discussing current uses of algorithmic trading and exploring the risks

to market integrity in connection with the evolving uses of artificial intelligence in algorithmic trading).

See, e.g., Nolan Schloneger, A Case for Regulating Gamified Investing, 56 Ind. L. Rev. 175 (2022) (“Th[e]

rise [of investing applications] is largely attributed to zero commission and fractional-share trading.”); John

Csiszar, How Our Approach to Investing Has Changed Forever, YAHOO! (Mar. 10, 2021),

https://www.yahoo.com/now/approach-investing-changed-forever-190007929.html (“Fractional share

trading is just in its infancy but appears well on its way to changing how consumers approach investing.

With fractional share trading, you can invest any dollar amount into stock, even if you don’t have enough

to buy a single share. . . . Fractional share investing allows nearly anyone to get involved in the stock

market without needing $100,000 or more to buy a properly diversified portfolio of individual stock

names.”). See also Staff Report on Equity and Options Market Structure Conditions in Early 2021 (Oct. 14,

2021), https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf

(“Some brokers have sought to attract new customers by offering the ability to purchase fractional shares.

Fractional shares give investors the ability to purchase less than 1 share of a stock.”). Any staff statements

represent the views of the staff. They are not a rule, regulation, or statement of the Commission.

Furthermore, the Commission has neither approved nor disapproved their content. These staff statements,

like all staff statements, have no legal force or effect: they do not alter or amend applicable law; and they

create no new or additional obligations for any person.

See, e.g., Maggie Fitzgerald, Retail Investors Continue to Jump Into the Stock Market After GameStop

Mania, CNBC (Mar. 10, 2021), https://www.cnbc.com/2021/03/10/retail-investor-ranks-in-the-stockmarket-continue-to-surge.html (providing year-over-year app download statistics for Robinhood, Webull,

have also expanded their use of technology to include “digital engagement practices” or “DEPs,”

such as behavioral prompts, differential marketing, game-like features (commonly referred to as

“gamification”), and other design elements or features designed to engage retail investors when

using a firm’s digital platforms (e.g., website, portal, app)29 for services such as trading, roboadvice, and financial education. Our staff has observed that firms use technology to more

efficiently develop investment strategies, including by using technology to automate their

services, and to analyze the success of specific features and marketing practices at influencing

retail investor behavior.30 Firms may also seek to lower expenses by replacing customer service

personnel with chatbots that can address common customer questions, and outsourcing their back

office operations to vendors that rely heavily on technology.31

The rate at which PDA-like technologies continues to evolve is increasing32 and firms are

exploring and deploying AI-based applications across different functions of their organizations,

including customer facing, investment, and operational activities.33 These PDA-like technologies

Sofi, Coinbase, TD Ameritrade, Charles Schwab, E-Trade, and Fidelity from 2018-2020, and monthly

figures for January and February of 2021); John Gittelsohn, Schwab Boosts New Trading Accounts 31%

After Fees Go to Zero, Bloomberg (Nov. 14, 2019), https://www.bloomberg.com/news/articles/2019-1114/schwab-boosts-brokerage-accounts-by-31-after-fees-cut-to-zero (noting that Charles Schwab opened

142,000 new trading accounts in October, a 31% jump over September’s pace).

Examples of DEPs include the following: social networking tools; games, streaks and other contests with

prizes; points, badges, and leaderboards; notifications; celebrations for trading; visual cues; ideas presented

at order placement and other curated lists or features; subscriptions and membership tiers; and chatbots.

See, e.g., SEC Investor Bulletin: Robo-Advisers (Feb. 23, 2017), https://www.sec.gov/oiea/investor-alertsbulletins/ib_robo-advisers (discussing automated digital investment advisory programs); see also FINRA

AI Report, supra note 9 (discussing three areas where broker-dealers are evaluating or using AI in the

securities industry: communications with customers, investment processes, and operational functions).

See, e.g., SS&C Gets Automation Rolling with 180 ‘Digital Workers’, Ignites (Feb. 9, 2023),

https://www.ignites.com/c/3928224/508304?referrer_module=searchSubFromIG&highlight=SS&C.

See, e.g., Robin Feldman and Kara Stein, AI Governance in the Financial Industry, 27 STAN. J.L. BUS. &

FIN. 94, 122 (2022) (describing AI as “a technology that is rapidly evolving and capable of learning.”).

See, e.g., Merav Ozair, FinanceGPT: The Next Generation of AI-Powered Robo Advisors and Chatbots

(June 27, 2023), https://www.nasdaq.com/articles/financegpt-the-next-generation-of-ai-powered-roboadvisors-and-chatbots (describing current uses and development) (“FinanceGPT").

are complex and may include several categories of machine learning34 algorithms, such as deep

learning,35 supervised learning,36 unsupervised learning,37 and reinforcement learning38

processes.39 In the past few years, these PDA-like technologies have made increasing use of

natural language processing and natural language generation.40 For example, AI has

revolutionized chatbots by enabling them to understand and respond to natural language more

accurately and learn and improve responses over time, leading to more personalized interactions

with users. Recently, a new wave of online chatbots has rapidly moved machines using AI into

new territory.41 Some of these chatbots have passed what is known as the “Turing test” and have

FINRA described “Machine Learning (ML)” as “a field of computer science that uses algorithms to process

large amounts of data and learn from it. Unlike traditional rules-based programming, [machine learning]

models learn from input data to make predictions or identify meaningful patterns without being explicitly

programmed to do so. There are different types of [machine-learning] models, depending on their intended

function and structure[.]” See FINRA AI Report, supra note 9.

FINRA described a “deep learning model” as a model “built on an artificial neural network, in which

algorithms process large amounts of unlabeled or unstructured data through multiple layers of learning in a

manner inspired by how neural networks function in the brain. These models are typically used when the

underlying data is significantly large in volume, obtained from disparate sources, and may have different

formats (e.g., text, voice, and video).” See id.

FINRA described a “supervised machine learning” as a model that “is trained with labeled input data that

correlates to a specified output…. The model is continuously refined to provide more accurate output as

additional training data becomes available. After the model has learned from the patterns in the training

data, it can then analyze additional data to produce the desired output . . . .” See id.

As described by FINRA, in unsupervised machine learning, “the input data is not labeled nor is the output

specified. Instead, the models are fed large amounts of raw data and the algorithms are designed to identify

any underlying meaningful patterns. The algorithms may cluster similar data but do so without any

preconceived notion of the output . . . .” See id.

As described by FINRA, in reinforcement learning, “the model learns dynamically to achieve the desired

output through trial and error. If the model algorithm performs correctly and achieves the intended output,

it is rewarded. Conversely, if it does not produce the desired output, it is penalized. Accordingly, the model

learns over time to perform in a way that maximizes the net reward . . . .” See id.

See also FSB AI Report, supra note 9; Treasury RFI, supra note 9.

See, e.g., FINRA AI Report, supra note 9.

See Cade Metz, How Smart Are the Robots Getting?, The New York Times (Jan. 20, 2023, updated Jan. 25,

2023).

become virtually indistinguishable from humans in particular situations.42 AI use is increasing

year over year and in an array of applications.43 For instance, some robo-advisers use chatbots

and NLP technology for their online platforms to provide investment advice and manage

investment portfolios.44 These platforms may use a combination of AI, machine learning, NLP,

and chatbot technologies to provide personalized investment recommendations to customers

based on customer risk tolerance and investment goals.

As a result of a growing desire to perform functions remotely and through automated

means, the COVID-19 pandemic accelerated the adoption of certain PDA-like technologies.45

Many expect this momentum to continue, with AI becoming a mainstream technology across

many industries, including the financial sector.46 Organizations, including firms in the securities

industry,47 are using AI in a multitude of ways, including responding to customer inquiries,

Id. The Turing test is a subjective test determined by whether the person interacting with a machine

believes that they are interacting with another person. See id.

Embracing the Rapid Pace of AI, MIT Technology Review Insights (May 19, 2021),

https://www.technologyreview.com/2021/05/19/1025016/embracing-the-rapid-pace-of-ai/.

See, e.g., FinanceGPT, supra note 33 (describing current uses and development).

See, e.g., Joe McKendrick, AI Adoption Skyrocketed Over the Last 18 Months, HARVARD BUS. REV. (Sept.

27, 2021), https://hbr.org/2021/09/ai-adoption-skyrocketed-over-the-last-18-months (“The [COVID-19]

crisis accelerated the adoption of analytics and AI, and this momentum will continue into the 2020s,

surveys show. Fifty-two percent of companies accelerated their AI adoption plans because of the Covid

crisis, a study by PwC finds. Just about all, 86%, say that AI is becoming a ‘mainstream technology’ at

their company in 2021. Harris Poll, working with Appen, found that 55% of companies reported they

accelerated their AI strategy in 2020 due to Covid, and 67% expect to further accelerate their AI strategy in

2021.”); KPMG, Thriving in an AI World: Unlocking the Value of AI Across Seven Key Industries (May

2021), at 5, https://advisory.kpmg.us/articles/2021/thriving-in-an-ai-world.html (“Thriving in an AI

World”); Blake Schmidt and Amanda Albright, AI Is Coming for Wealth Management. Here’s What That

Means, Bloomberg Markets (Apr. 21, 2023), https://www.bloomberg.com/news/articles/2023-0421/vanguard-fidelity-experts-explain-how-ai-is-changing-wealth-management (discussing experts views on

AI impact on the wealth management industry).

Id.

See IOSCO, The use of artificial intelligence and machine learning by market intermediaries and asset

managers (Sept. 2021), at 1 (“IOSCO AI/ML Report”), iosco.org/library/pubdocs/pdf/IOSCOPD684.pdf

(“Artificial Intelligence (AI) and Machine Learning (ML) are increasingly used in financial services, due to

a combination of increased data availability and computing power. The use of AI and ML by market

intermediaries and asset managers may be altering firms’ business models.”).

automating back-office processes, quality control,48 risk management, client identification and

monitoring, selection of trading algorithms, and portfolio management.49 Others are actively

developing investment advisory services based on PDA-like technologies.50 Further, recent

advancements in data collection techniques have significantly enhanced the scale and scope of

data analytics, and its potential applications. Due to increases in processing power and data

storage capacity, a vast amount of data is now available for high-speed analysis using these

technologies.51 Furthermore, the range of data types has also expanded, with consumer shopping

histories, media preferences, and online behavior now among the many types of data that data

analytics can use to synthesize information, forecast financial outcomes, and predict investor and

customer behavior.52 Consequently, these technologies can be applied in novel and powerful

ways which may be subtle, such as using the layout of an app and choice of data presentation and

See Thriving in an AI World, supra note 45; see also FINRA AI Report, supra note 9, at 5-10 (noting the

use of AI in the securities industry for communications with customers, investment processes, and

operational functions); FINRA, Deep Learning: The Future of the Market Manipulation Surveillance

Program https://www.finra.org/media-center/finra-unscripted/deep-learning-market-surveillance

(“FINRA’s Market Regulation and Technology teams recently wrapped up an extensive project to migrate

the majority of FINRA’s market manipulation surveillance program to using deep learning in what is

perhaps the largest application of artificial intelligence in the RegTech space to date.”); Machine Learning

and Market Manipulation, supra note 26; IOSCO AI/ML Report, id.

IOSCO AI/ML Report, supra note 47.

See, e.g., Hugh Son, JPMorgan is developing a ChatGPT-like A.I. service that gives investment advice,

CNBC (May 25, 2023), https://www.cnbc.com/2023/05/25/jpmorgan-develops-ai-investment-advisor.html

(discussing a trademark application filed by JPMorgan for a product called IndexGPT that will utilize

“cloud computing software using artificial intelligence” for “analyzing and selecting securities tailored to

customer needs[.]”).

See, e.g., Dimitris Andriosopoulos et al., Computational Approaches and Data Analytics in Financial

Services: A Literature Review, 70 J. OPERATIONAL RSCH. SOC. 1581 (2019),

https://doi.org/10.1080/01605682.2019.1595193; James Lawler & Anthony Joseph, Big Data Analytics

Methodology in the Financial Industry, 15 INFO. SYS. ED. J. 38 (July 2017), https://isedj.org/201715/n4/ISEDJv15n4p38.html.

Daniel Broby, The Use of Predictive Analytics in Finance, 8 J. FIN & DATA SCI. 145 (Nov. 2022),

https://doi.org/10.1016/j.jfds.2022.05.003; OECD, Artificial Intelligence, Machine Learning and Big Data

in Finance: Opportunities, Challenges, and Implications for Policy Makers (2021),

https://www.oecd.org/finance/financial-markets/Artificial-intelligence-machine-learning-big-data-infinance.pdf.

formatting to influence trading decisions.53 Some trading apps use PDA and AI/machine learning

along with detailed user data to increase user engagement and trading activity.54

Any risks of conflicts of interest associated with AI use will expand as firms’ use of AI

grows. These risks will have broad consequences if AI makes decisions that favor the firms’

interests and then rapidly deploys that information to investors, potentially on a large scale.55

Firms’ nascent use of AI may already be exposing investors to these types of risks as well as

others.56 We are concerned that firms will intentionally or unintentionally take their own interest

into account in the data or software underlying the applicable AI, as well as the applicable PDAlike technologies, resulting in investor harm. Among other things, a firm may use these

technologies to optimize for the firm’s revenue or to generate behavioral prompts or social

See, e.g., Sayan Chaudhury and Chinmay Kulkarni, Design Patterns of Investing Apps and Their Effects on

Investing Behaviors (2021) (“Chaudhury & Kulkarni”), dl.acm.org/doi/fullHtml/10.1145/3461778.3462008

(“investing apps can be considered as technical and social choice architectures that influence investing

behavior”).

See, e.g., Alex McFarland, 10 “Best” AI Stock Trading Bots, Unite.AI (June 4, 2023),

https://www.unite.ai/stock-trading-bots/.

See, e.g., Robo-Advisors and the Fiduciary and Best Interest Standards, supra note 12 (stating that the

impact of firm conflicts of robo-advisors “are arguably more detrimental than personal conflicts between an

advisor and client because the number of clients impacted by the firm conflict is potentially exponentially

higher.”). See also AI in Asset Management, supra note 14 (“AI can make wrong decisions based on

incorrect inferences that have captured spurious or irrelevant patterns in the data. For example, ANNs

[artificial neural networks] that are trained to pick stocks with high expected returns might select illiquid,

distressed stocks.”); FINRA AI Report, supra note 9, at 11-19 (noting that the use of AI “raises several

concerns that may be wide-ranging across various industries as well as some specific to the securities

industry. Over the past few years, there have been numerous incidents reported about AI applications that

may have been fraudulent, nefarious, discriminatory, or unfair, highlighting the issue of ethics in AI

applications.”); FINRA AI Report, supra note 9, at 13 (“Depending on the use case, data scarcity may limit

the model’s analysis and outcomes, and could produce results that may be narrow and irrelevant. On the

other hand, incorporating data from many different sources may introduce newer risks if the data is not

tested and validated, particularly if new data points fall outside of the dataset used to train the model.”).

See, e.g., FINRA AI Report, supra note 9, at 5 (“The use of AI-based applications is proliferating in the

securities industry[.]”); Sophia Duffy and Steve Parrish, You Say Fiduciary, I Say Binary: A Review and

Recommendation of Robo-Advisors and the Fiduciary and Best Interest Standards, 17 Hastings Bus. L.J. 3,

at 26 (2021) (“robo-advisors can be, and often are, intentionally programmed to favor the institution by

making recommendations that favor the institution’s products, rebalance client portfolios in ways which

will allow the institution to earn more fees, and otherwise make recommendations that benefit the firm”).

engineering to change investor behavior in a manner that benefits the firm but is to the detriment

of the investor.

Commission Protection of Investors as Technology Has Evolved

As noted above, firms’ use of technology and subsequent adaptation incorporating

emerging technologies are not new.57 At the same time, the Commission has addressed firms’

relationships with investors in a variety of ways to ensure investor protection as use of

technology in those relationships has evolved over time.58 The proposal, thus, is consistent with

the Commission’s practice of evolving our regulation in light of market and technological

developments.

Broker-dealers and investment advisers are currently subject to extensive obligations

under Federal securities laws and regulations, and, in the case of broker-dealers, rules of selfregulatory organizations,59 that are designed to promote conduct that, among other things,

protects investors, including protecting investors from conflicts of interest.60 To the extent PDA-

See supra section I.B.2.

See infra note 114.

Any person operating as a “broker” or “dealer” in the U.S. securities markets must register with the

Commission, absent an exception or exemption. See Exchange Act section 15(a), 15 U.S.C. 78o(a); see

also Exchange Act sections 3(a)(4) and 3(a)(5), 15 U.S.C. 78c(a)(4) and 78c(a)(5) (definitions of “broker”

and “dealer,” respectively). Generally, all registered broker-dealers that deal with the public must become

members of FINRA, a registered national securities association, unless the broker or dealer effects

transactions in securities solely on an exchange of which it is a member. See Exchange Act section

15(b)(8), 15 U.S.C. 78o(b)(8); see also 17 CFR 240.15b9-1 (providing an exemption from Section

15(b)(8)). FINRA is the sole national securities association registered with the SEC under Section 15A of

the Exchange Act. Because this release is focused on broker-dealers that deal with the public and are

FINRA member firms (unless an exception applies), we refer to FINRA rules as broadly applying to

“broker-dealers,” rather than to “FINRA member firms.”

See infra section III.C.3; Fiduciary Interpretation, supra note 8, at section II.C. (“The duty of loyalty

requires that an adviser not subordinate its clients’ interests to its own.”); see also Reg BI Adopting

Release, supra note 8, at section II.A.1. (The “without placing the financial or other interest . . . ahead of

like technologies are used in investor interactions that are subject to existing obligations, those

obligations apply. These obligations include, but are not limited to, obligations related to

investment advice and recommendations;61 general and specific requirements aimed at

addressing certain conflicts of interest, including requirements to eliminate, mitigate, or disclose

certain conflicts of interest; disclosure of firms’ services, fees, and costs; disclosure of certain

business practices, advertising, communications with the public (including the use of

“investment analysis tools”); supervision; and obligations related to policies and procedures.62 In

addition to these obligations, Federal securities laws and regulations broadly prohibit fraud by

broker-dealers and investment advisers as well as fraud by any person in the offer, purchase, or

sale of securities, or in connection with the purchase or sale of securities.

The Commission has long acted to protect investors against the harm that can come when

a firm acts on its conflicts of interest.63 For example, the Commission has brought enforcement

the interest of the retail customer” phrasing recognizes that while a broker-dealer will inevitably have some

financial interest in a recommendation—the nature and magnitude of which will vary—the broker-dealer’s

interests cannot be placed ahead of the retail customer’s interest”). Additionally, broker-dealers often

provide a range of services that do not involve a recommendation to a retail customer—which is required in

order for Reg BI to apply—and those services are subject to general and specific requirements to address

associated conflicts of interest under the Exchange Act, Securities Act of 1933, and relevant self-regulatory

organization (“SRO”) rules as applicable. See also FINRA Report on Conflicts of Interest (Oct. 2013), at

Appendix I (Conflicts Regulation in the United States and Selected International Jurisdictions) (“FINRA

Conflict Report”), https://www.finra.org/sites/default/files/Industry/p359971.pdf (describing broad

obligations under SEC and FINRA rules as well as specific conflicts-related disclosure requirements under

FINRA rules).

See, e.g., 17 CFR 240.15l-1(a)(1) (“Exchange Act rule 15l-1(a)(1)”) (requiring broker-dealers and their

associated persons to act in the best interest of retail customers when making recommendations, without

placing the financial or other interest of the broker-dealer or its associated person ahead of the interest of

the retail customer).

Compliance with the proposed conflicts rules would not alter a broker-dealer’s or investment adviser’s

existing obligations under the Federal securities laws. The proposed conflicts rules would apply in addition

to any other obligations under the Exchange Act and Advisers Act, along with any rules the Commission

may adopt thereunder, and any other applicable provisions of the Federal securities laws and related rules

and regulations.

See infra section III.C.

actions regarding an investment adviser’s fiduciary duty to its clients with respect to conflicts of

interest.64 Similarly, the Commission has reinforced fraud protection for investors in pooled

investment vehicles against conflicts of interest through rule 206(4)-8.65 The Commission

regulates investment adviser advertising and marketing practices to protect against, among

others, adviser conflicts of interest that may taint such marketing, including through recent

amendments adapting those protections in light of the evolution of practices and technologies.66

Likewise, broker-dealers have long been subject to Commission and SRO regulations and

rules that govern their business conduct, including general and specific obligations to address

conflicts of interest.67 For example, under existing antifraud provisions of the Exchange Act, a

See, e.g., SEC Press Release, SEC Share Class Initiative Returning More Than $125 Million to Investors:

Reflecting SEC’s Commitment to Retail Investors, 79 Investment Advisers Who Self-Reported Advisers

Act Violations Agree to Compensate Investors Promptly, Ensure Adequate Fee Disclosures (Mar. 11,

2019), https://www.sec.gov/news/press-release/2019-28 (describing settled orders against 79 investment

advisers finding that the settling investment advisers placed their clients in mutual fund share classes that

charged 12b-1 fees when lower-cost share classes of the same fund were available to their clients without

adequately disclosing that the higher cost share class would be selected; according to the SEC’s orders, the

12b-1 fees were routinely paid to the investment advisers in their capacity as brokers, to their broker-dealer

affiliates, or to their personnel who were also registered representatives, creating a conflict of interest with

their clients, as the investment advisers stood to benefit from the clients’ paying higher fees); SEC v. Sergei

Polevikov, et al., Litigation Release No. 25475 (Aug. 17, 2022) (settled order) (final judgment against

employee working as a quantitative analyst at two asset management firms “for perpetrating a frontrunning scheme that generated profits of approximately $8.5 million”); SEC Brings Settled Actions

Charging Cherry-Picking and Compliance Failures, Adm. Proc. File No. 3-20955 (Aug 10, 2022) (settled

order) (alleged multi-year cherry-picking scheme of former investment adviser representative of registered

investment adviser preferentially allocating profitable trades or failing to allocate unprofitable trades to a

adviser’s personal accounts at the expense of the advisers client accounts).

17 CFR 275.206(4)-8; see, e.g., In re. Virtua Capital Management, LLC, et al., Advisers Act Release No.

6033 (May 23, 2022) (allegedly failing to disclose conflicts of interest and associated fees, and breaching

fiduciary duty to multiple private investment funds) (settled order).

See Investment Adviser Marketing Release, supra note 19, at section I (“The concerns that motivated the

Commission to adopt the advertising and solicitation rules [in 1961 and 1979, respectively] still exist today,

but investment adviser marketing has evolved with advances in technology. In the decades since the

adoption of both the advertising and solicitation rules, the use of the internet, mobile applications, and

social media has become an integral part of business communications. Consumers today often rely on these

forms of communication to obtain information, including reviews and referrals, when considering buying

goods and services. Advisers and third parties also rely on these same types of outlets to attract and refer

potential customers.”).

See infra section III.C.3

broker-dealer has a duty to disclose material adverse information to its customers.68 Indeed, the

Commission has enforced a broker-dealer’s duty to disclose material conflicts of interest under

the antifraud provisions.69 Broker-dealers are subject to specific FINRA rules aimed at

addressing certain conflicts of interest.70 Moreover, in 2019 the Commission adopted Regulation

Best Interest (“Reg BI”), which was designed to enhance the quality of broker-dealer

recommendations to retail customers and reduce the potential harm to retail customers that may

be caused by conflicts of interest,71 by requiring broker-dealers that make recommendations to

retail customers to, among other things, establish, maintain, and enforce policies and procedures

reasonably designed to identify and disclose, mitigate, or eliminate, conflicts associated with a

recommendation, including conflicts of interest that may result through the use of PDA-like

technology to make recommendations (Reg BI’s “Conflict of Interest Obligation”).72

A broker-dealer may be liable if it does not disclose “material adverse facts of which it is aware.” See, e.g.,

Chasins v. Smith, Barney & Co., 438 F.2d 1167, 1172 (2nd Cir. 1970); SEC v. Hasho, 784 F. Supp. 1059,

1110 (S.D.N.Y. 1992); In the Matter of RichMark Capital Corp., Exchange Act Release No. 48758 (Nov. 7,

2003) (Commission Opinion) (“When a securities dealer recommends stock to a customer, it is not only

obligated to avoid affirmative misstatements, but also must disclose material adverse facts of which it is

aware. That includes disclosure of ‘adverse interests’ such as ‘economic self-interest’ that could have

influenced its recommendation.”) (citations omitted).

See, e.g., In re. Edward D. Jones & Co, Securities Act Release No. 8520 (Dec. 22, 2004) (settled order)

(broker-dealer violated antifraud provisions of Securities Act and Exchange Act by failing to disclose

conflicts of interest arising from receipt of revenue sharing, directed brokerage payments and other

payments from “preferred” families that were exclusively promoted by broker-dealer); In re. Morgan

Stanley DW Inc., Securities Act Release No. 8339 (Nov. 17, 2003) (settled order) (broker-dealer violated

antifraud provisions of Securities Act by failing to disclose special promotion of funds from families that

paid revenue sharing and portfolio brokerage).

FINRA rules establish restrictions on the use of non-cash compensation in connection with the sale and

distribution of mutual funds, variable annuities, direct participation program securities, public offerings of

debt and equity securities, investment company securities, real estate investment trust programs, and the

use of non-cash compensation to influence or reward employees of others. See FINRA Rules 2310, 2320,

2331, 2341, 5110, and 3220. These rules generally limit the manner in which members can pay or accept

non-cash compensation and detail the types of non-cash compensation that are permissible.

See Reg BI Adopting Release supra note 8, at text accompanying n.21.

17 CFR 240.15l-1(a)(2)(iii) (“Exchange Act rule 15l-1(a)(2)(iii)”).

The Commission has and will continue to bring enforcement actions for violations of the

Federal securities laws that entail the use of PDA-like technologies. However, the rapid

acceleration of PDA-like technologies and their adoption in the investment industry,73 the

additional challenges associated with identifying and addressing conflicts of interest resulting

from the use of these new technologies, and the concerns relating to scalability, discussed above,

reinforce the importance of ensuring our regulatory regime specifically addresses these issues. In

particular, disclosure may be ineffective in light of, as discussed above, the rate of investor

interactions, the size of the datasets, the complexity of the algorithms on which the PDA-like

technology is based, and the ability of the technology to learn investor preferences or behavior,

which could entail providing disclosure that is lengthy, highly technical, and variable, which

could cause investors difficulty in understanding the disclosure.

In light of these concerns, and the harm to investors that can result when firms act on

conflicts of interest, we are proposing rules to address conflicts of interest associated with a

firm’s use of PDA-like technologies when interacting with investors that are contrary to the

public interest and the protection of investors. In particular, the recent and rapid expansion of

PDA-like technologies in the context of investment-related activities, without specific oversight

obligations tailored to the specific risks involved in their use, can lead to outcomes that

financially benefit firms at the expense of investors. Such a harm to investors might include the

use of PDA-like technologies that prompt investors to enroll in products or services that

See, e.g., Amy Caiazza, Rob Rosenblum, and Danielle Sartain, Investment Advisers’ Fiduciary Duties: The

Use of Artificial Intelligence, Harvard Law School Forum on Corporate Governance (June 11, 2020),

https://corpgov.law.harvard.edu/2020/06/11/investment-advisers-fiduciary-duties-the-use-of-artificialintelligence/ (“Artificial intelligence (AI) is an increasingly important technology within the investment

management industry.”); FINRA AI Report, supra note 9, at 5 (“The use of AI-based applications is

proliferating in the securities industry and transforming various functions within broker-dealers.”).

financially benefit the firm but may not be consistent with their investment goals or risk

tolerance, encourage investors to enter into more frequent trades or employ riskier trading

strategies (e.g., margin trading) that will increase the firm’s profit at the investors’ expense, or

inappropriately steer investors toward complex and risky securities products inconsistent with

investors’ investment objectives or risk profiles that result in harm to investors but that

financially benefit the firm. Due to the inherent complexity and opacity of these technologies as

well as their potential for scaling, we are proposing that such conflicts of interest should be

eliminated or their effects should be neutralized, rather than handled by other methods of

addressing the conflicts, such as through disclosure and consent. Moreover, many of these

technologies provide means—for example, A/B testing74—to empirically assess the conflicts’

impact and thus to neutralize the effect of a conflict on investors. Further, reliance on scalable,

complex, and opaque PDA-like technologies can result in operational challenges or

shortcomings. For example, failure to identify and address conflicts that may be present in the

PDA-like technology used to steer investors toward a product or service could result in a firm’s

failure to identify the risks to investors of certain investing behaviors that place the firm’s

interest ahead of investors’ interest as well as inadequate compliance policies and procedures

that would assist the firm in curbing these practices. As a consequence, this could result in the

failure to take sufficient steps to address the potentially harmful effect of those conflicts.75 For

A/B testing refers to running a learning model on two different datasets with a single change between the

two, which can help identify causal relationships and, through understanding how changes affect outcomes,

gain a better understanding of the functionality of a model. See Seldon, A/B Testing for Machine Learning

(July 7, 2021) (“Seldon”), https://www.seldon.io/a-b-testing-for-machine-learning.

See, e.g., William Shaw and Aisha S. Gani, Wall Street Banks Seizing AI to Rewire the World of Finance,

Financial Review (June 1, 2023) (in discussing fiduciary duty obligation when using AI in finance quoting

a law firm partner as saying: “How do you demonstrate to investors and regulators that you’ve done your

duty when you’ve used an output without really knowing what the inputs are?”).

these additional reasons, we are proposing that such conflicts of interest be eliminated or their

effects be neutralized, rather than handled by other methods of addressing the conflicts, such as

through disclosure and consent.

Use of Predictive Data Technologies in Investor Interactions

Firms may use PDA-like technologies to transform user interfaces and the interactions

that investors have on digital platforms.76 For example, firms may collect data from a variety of

internal sources (e.g., trading desks, customer account histories, and communications) and

external sources (e.g., public filings, social media platforms, and satellite images) in both

structured and unstructured formats,77 enabling them to develop an understanding of investor

preferences and adapt the interface and related prompts to appeal to those preferences. Firms

may use these tools to increase the quantity of information used to support investment ideas,78

leverage investor data to send targeted questionnaires to investors regarding evolving investment

goals, identify which investors might be open to a new investment product, or identify which

investors are most likely to stop using a firm’s services.79 We are concerned, however, that a

firm’s use of PDA-like technologies when engaging or communicating with—including by

providing information to, providing recommendations or advice to, or soliciting—a prospective

or current investor could take into consideration the firm’s interest in a manner that places its

See, e.g., FSB AI Report, supra note 9, at 14-15 (chatbots are being introduced by a range of financial

services firms, often in mobile apps or social media, and chatbots are “increasingly moving toward giving

advice and prompting customers to act”).

See FINRA AI Report, supra note 9, at 4.

See Deloitte, Artificial intelligence: The next frontier for investment management firms (Feb. 5, 2019),

https://www.deloitte.com/global/en/Industries/financial-services/perspectives/ai-next-frontier-ininvestment-management.html.

See Ryan W. Neal, Three Firms Where Artificial Intelligence is Helping with Financial Planning (Jan. 17,

2020), https://www.investmentnews.com/artificial-intelligence-advisers-176541 (describing current uses of

AI and their potential application to broker-dealers and investment advisers).

interests ahead of investors’ interests and thus harm investors.80 For example, some members of

the public have expressed concern that firms’ use of these PDA-like technologies encourages

practices that are profitable for the firm but may increase investors’ costs, undermine investors’

performance, or expose investors to unnecessary risks based on their individual investment

profile, such as: (i) excessive trading,81 (ii) using trading strategies that carry additional risk (e.g.,

options trading and trading on margin), and (iii) trading in complex securities products that are

more remunerative to the firm but pose undue risk to the investor.82

While the proposed rules apply more broadly to the use of covered technology in investor interactions, as

discussed below, firms using covered technology to provide advice or make recommendations are subject

to standards of conduct, among other regulatory obligations, that already apply to such advice or

recommendations. See infra section III.C.3. The proposed conflicts rules would apply in addition to these

standards of conduct and other regulatory obligations.

See, e.g., Comment Letter from Pace Investor Rights Clinic (Oct. 1, 2021) (“Pace University Letter”)

(“DEPs can lead investors to trade more frequently and more often than is in their best interest. For

example, the push notification feature provides investors with live price updates. This intentionally prompts

investors to check their portfolios after receiving the notification, which can lead them to make additional

trades or spend more time on the platform than they would have otherwise. Traditionally, the goal of

investing for most retail investors is to save for the long term. Frequently checking their portfolio may

cause investors to make decisions not in line with the goal of long-term saving and generational wealth

building.”). See also, e.g., Feedback Flyer Response of Lincoln Li on S7-10-21 (Aug. 27, 2021) (“I started

half a decade ago following value investing practices. However, [online investment and trading apps], that I

used for a short time got me into day trading and speculation more frequently. I ended up stopping using

these apps because they took up so much time with little gain. I spent more time long term trading based off

of proper market factors and evaluation. There’s a big concern to me, especially as a professional game

designer, as to how gamification in life impacting subjects can have negative impact on society, culture and

personal finances. I have friends who got into technical trading and day trading due to these apps, who talk

more like gamblers than actual investors. It sets a very poor precedent for this industry and behavior.”);

Feedback Flyer Response of Richard Green on S7-10-21 (Sept. 25, 2021) (responding to a question about

online trading and investment platforms: “[m]y broker rewards referrals by offering free stocks for each

referral. I think this pulls new investors into trading, which makes a lot of money for the broker, as newer

investors are more likely to trade too frequently or make mistakes.”); Feedback Flyer Response of Joseph

on S7-10-21 (Aug. 28, 2021) (“[A trading app’s] user interface is set up in a way to subconsciously

influence retail traders to trade more frequently and engage in riskier investment products (options) than the

average amount.”).

In Congressional hearings related to market events in January 2021, investor protection concerns were

identified relating to the use of certain types of DEPs, including advertisements targeted towards specific

groups of investors on digital platforms and game-like features on mobile apps. See Game Stopped? Who

Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide: Hearing Before the H.

In some cases, the use of PDA-like technologies to place a firm’s interests ahead of

investors’ interests could reflect an intentional design choice.83 In other cases, however, the

actions that place a firm’s interests ahead of the interest of investors may instead reflect the

firm’s failure to fully understand the effects of its use of PDA-like technologies or to provide

appropriate oversight of its use of such technologies.84 For example, AI and other similar

technology are only as good as the data upon which it is based. Corrupted or mislabeled data,

biased data, or data from unknown sources, can undermine data quality, leading to skewed

outcomes with opaque biases as well as unintended failures.85

While the risk of poor data quality or skewed data is not unique to AI, the ability of PDAlike technologies used in investor interactions to process data more quickly than humans, and the

potential for technology to disseminate the resulting communications to a mass market, can

Comm. on Fin. Servs., 113th Cong. (2021),

https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=407107; Game Stopped? Who

Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide, Part II: Hearing Before the

H. Comm. on Fin. Servs., 113th Cong. (2021),

https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=406268; Game Stopped? Who

Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide, Part III: Hearing Before

the H. Comm. on Fin. Servs., 113th Cong. (2021),

https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=407748; Who Wins on Wall Street?

GameStop, Robinhood, and the State of Retail Investing: Hearing Before the S. Comm. On Banking,

Hous., & Urban Affairs, 113th Cong. (2021), https://www.banking.senate.gov/hearings/who-wins-on-wallstreet-gamestop-robinhoodand-the-state-of-retail-investing.

See, e.g., Megan Ji, Note, Are Robots Good Fiduciaries? Regulating Robo-Advisors Under the Investment

Advisers Act of 1940, 117 COLUM. L. REV. 1543, 1580 (Oct. 2017) (recommending that the Commission

adopt regulations in which “robo-advisors, in their disclosures, clearly delineate between conflicts that are

programmed into their algorithms and conflicts that may affect the design of algorithms.”).

See Catherine Thorbecke, Plagued with errors: A news outlet’s decision to write stories with AI backfires,

CNN (Jan. 23, 2023), https://www.cnn.com/2023/01/25/tech/cnet-ai-tool-news-stories/index.html.

See e.g., Regulation Systems Compliance and Integrity, Release No. 34-97143 (Mar. 15, 2023) [88 FR

23146 (Apr. 14, 2023)] (describing the potential market impact of a corrupted data security-based swap

data repository). See also National Institute of Science and Technology Special Publication 1270, Towards

a Standard for Identifying and Managing Bias in Artificial Intelligence (Mar. 2022), at section 3.1

(describing dataset challenges resulting in AI bias, discrimination, and systematic gaps in performance);

Thor Olavsrud, 7 famous analytics and AI disasters (Apr. 15, 2022), https://www.cio.com/article/190888/5famous-analytics-and-ai-disasters.html.

quickly magnify conflicts of interest and any resulting negative effects on investors. Moreover,

erroneous data considered by a firm’s algorithm could have the effect of optimizing for the

firm’s interest over investors’ interest by, for example, relying on outdated, previously higher

cost information of investment options sponsored by other firms but relying on updated, lower

cost information of identical investment options sponsored by the firm. This could result in a

recommendation, advice, or other investor interaction that favors the firm’s sponsored products

and creates a conflict, regardless of whether the firm intentionally developed the algorithm to

optimize for its interest.86 Poor data quality or skewed data could not only limit the learning

capability of an AI or machine learning system but could also potentially negatively impact how

it makes inferences and decisions in the future,87 giving rise to erroneous or poor predictions,

resulting in a failure to achieve the system’s intended objectives,88 and benefiting the firm over

investors (whether intentionally or unintentionally).

We have observed instances where conflicts of interest associated with a firm’s use of

PDA-like technologies have resulted in harm to investors. A recent enforcement action involved

allegations that an adviser marketed that its “no fee” robo-adviser portfolios were determined

through a “disciplined portfolio construction methodology” when they allegedly were pre-set to

hold a certain percent of assets in cash because the adviser’s affiliate was guaranteed a certain

amount of revenue at these levels. The adviser allegedly did not disclose its conflict of interest in

In this example, it is also possible that erroneous data could result in the reverse effect, generating a

recommendation in favor of a non-sponsored product when the firm’s sponsored product may be more costeffective. This would not result in a conflict under the proposed rules but would nonetheless be subject to

firms’ obligations under their respective regulatory regimes, including the applicable standard of conduct.

See Artificial Intelligence/Machine Learning Risk & Security Working Group (AIRS), Artificial

Intelligence Risk & Governance, at 2.1.1 (accessed Apr. 18, 2023) (“AIRS White Paper”),

https://aiab.wharton.upenn.edu/research/artificial-intelligence-risk-governance/.

Id.

setting the cash allocations; that this conflict resulted in higher cash allocations, which could

negatively impact performance in a rising market; and that the cash allocations were higher than

other services because clients did not pay a fee.89 While the focus of that action was on the

alleged disclosure failure, it also highlights the potential for PDA-like technologies to be used in

ways that advance a firm’s interests at the expense of its investors’ interests. The proposed

conflicts rules would require a firm to analyze its investor interactions that use PDA-like

technology for the types of conflicts of interest that were at issue in that action in order to

determine whether the investor interaction places the firm’s interests ahead of its investors’

interests and, if so, eliminate, or neutralize the effect of, the conflicts of interest on investors. In

addition, the Commission’s 2021 Request for Information and Comments on Broker-Dealer and

Investment Adviser Digital Engagement Practices, Related Tools and Methods, and Regulatory

Considerations and Potential Approaches (“Request”)90 solicited comments related to conflicts of

interest, among other areas.91 In response, the Commission received comments reflecting

perceived conflicts of interest related to the use of online investing and trading applications,

which some commenters indicated undermine their faith in the fairness of the markets.92

In re. Charles Schwab & Co., Inc., et al., Exchange Act Release No. 95087 (June 13, 2022) (settled order).

See Request for Information and Comments on Broker-Dealer and Investment Adviser Digital Engagement

Practices, Related Tools and Methods, and Regulatory Considerations and Potential Approaches, Exchange

Act Release No. 92766 (Aug. 27, 2021) [86 FR 49067 (Sept. 1, 2021)].

See id., questions 1.26, 2.6, 3.5, 3.16, and 4.15. For additional discussion regarding the Request, see infra

section I.B.5

See, e.g., Feedback Flyer Response of Tomas Liutvinas on S7-10-21 (Aug. 28, 2021) (“It seems like there

is no conflict of interest regulations in the US financial system. This makes me uneasy. Until the rights are

fully explained, reported, and undone I will recommend to anyone I know to stay away from US markets.

For myself, I've invested in a certain position with plans to leave the investment for the future generations

of my family, to hold on hopefully up to a point when markets will be made transparent and fair.”);

Feedback Flyer Response of Jasper Pummell on S7-10-21 (Aug. 28, 2021) (“I believe that online

Failures to appropriately oversee these PDA-like technologies compound the risk that

conflicts of interest may not be appropriately identified or managed. Due to the complexity and

opacity of certain technologies, firms should have robust practices to appropriately oversee and

understand their use and take steps to identify and appropriately address any associated conflicts

of interest. For example, without appropriate personnel, a firm may not have the ability to

modify the software or may lack the expertise to understand, monitor, or appropriately update

code, limiting the firm’s ability to identify and appropriately address associated conflicts of

interest. Furthermore, if the firm does not understand how the technology operates—including

whether it takes into consideration the firm’s interest and how it can influence investor

conduct—the firm may not fully understand whether, how, or the extent to which it is placing the

firm’s interests ahead of investors’ interests. As a result of the complexity and opacity of PDAlike technologies, a firm needs different and specific practices to evaluate its use of the

technology and recognize the risk of conflicts presented by that use compared to other practices.

Without appropriate oversight and understanding of the conflicts of interest that could be

brokerages have a conflict of interest and financial regulation is needed to ensure that the markets are a safe

place for retail traders.”); Feedback Flyer Response of Robert on S7-10-21 (Aug. 27, 2021) (“Retail needs a

fair and transparent market. There are blantant [sic] conflicts of interest in the market which should be

rectified immediately. Failure to do so will have a mass exodus of investors from the US stock market.”).

See also FINRA AI Report, supra note 9, at 11 (“However, use of AI also raises several concerns that may

be wide-ranging across various industries as well as some specific to the securities industry. Over the past

few years, there have been numerous incidents reported about AI applications that may have been

fraudulent, nefarious, discriminatory, or unfair, highlighting the issue of ethics in AI applications.”). But

see, e.g., Comment Letter from David Dusseault, President, Robinhood Financial, LLC (Oct. 1, 2021)

(“Robinhood Letter”) (stating that conflicts of interest are not new to the financial industry and that the

regulatory frameworks established by the SEC, such as Reg BI and the disclosure requirements of the

Investment Advisers Act of 1940, rest on the principle that conflicts of interest exist, but investors are able

to navigate them when they are adequately disclosed); Comment Letter from Investment Adviser

Association (Oct. 1, 2021) (“IAA Letter”); Comment Letter from Kevin M. Carroll, Managing Director and

Associate General Counsel, Securities Industry and Financial Markets Association (Oct. 1, 2021) (“SIFMA

Letter”) (generally opposing new rules, guidance, or interpretations to address the use of digital

engagement practices). These comments are all available in the comment file at

https://www.sec.gov/comments/s7-10-21/s71021.htm.

amplified when the technology is incorporated into investor-facing interactions, such as design

elements, features, or communications that nudge or prompt certain or more immediate action by

an investor, investor harm can result.

Request for Information and Comment

In August 2021, the Commission issued a request for information and public comment on

the use of DEPs by broker-dealers and investment advisers, as well as the analytical and

technological tools and methods used in connection with these DEPs.93 For purposes of the

Request, the Commission defined DEPs broadly to include behavioral prompts, differential

marketing, game-like features, and other design elements or features designed to engage retail

investors.94 The Commission stated that DEPs may be designed to encourage account opening,

account funding and trading, or may be designed solely to increase investor engagement with

investing apps, as there may be value in the number of investors interacting with the platform,

how often they visit, and how long they stay.95 The Request was issued in part to assist the

Commission and its staff in better understanding the market practices associated with the use of

DEPs by firms, facilitate an assessment of existing regulations and consideration of whether

regulatory action may be needed to further the Commission’s mission in connection with firms’

use of DEPs, as well as to provide a forum for market participants (including investors), and

other interested parties to share their perspectives on the use of DEPs and the related tools and

See Request, supra note 90.

See id. at 49067.

See id. at 49069.

methods, including potential benefits that DEPs provide to retail investors, as well as potential

investor protection concerns.96

The Commission received over 2,300 public comments, including submissions provided

through an online “feedback flyer” that accompanied the Request and was provided to better

facilitate responses from retail investors.97 Commenters offered a wide range of perspectives on

broker-dealers’ and investment advisers’ use of DEPs, addressing their purpose, providing

information on how investors interact with them, and offering broad reflections on potential

regulatory action. Commenters also provided views on benefits and risks related to firms’ use of

DEPs, as well as the AI/machine learning and behavioral psychology that firms use to develop

and deploy DEPs.98

A number of commenters also provided detailed feedback regarding the potential need

for additional action to address the issues presented by DEPs and their underlying technology.

For example, multiple commenters raised concerns over the risks of harm to investors if the

Commission did not act, and requested that the Commission interpret existing regulations in a

As noted in the Request, the market practices explored included: (i) the extent to which firms use DEPs; (ii)

the types of DEPs most frequently used; (iii) the tools and methods used to develop and implement DEPs;

and (iv) information pertaining to retail investor engagement with DEPs, including any data related to

investor demographics, trading behaviors, and investment performance. See id. at 49068.

The “Feedback Flyer” was attached as Appendix A to the Request and asked individual investors to

provide their comments with regard to online trading or investment platforms, such as websites and mobile

applications, to provide the Commission with a better understanding of retail investors’ experiences on

these platforms. The Feedback Flyer provided 11 different question prompts, with an array of both multiple

choice, and free text response options whereby respondents could submit relevant comments. Comments

received in response to the Request are available at https://www.sec.gov/comments/s7-10-21/s71021.htm.

See e.g., Comment Letter from American Securities Association (Sept. 30, 2021); Comment Letter from

Securities Arbitration Clinic and Professor of Clinical Legal Education, St. John’s University School of

Law Securities Arbitration Clinic, (Oct. 1, 2021) (“St. John’s Letter”); Comment Letter from Morningstar,

Inc. and Morningstar Investment Management, LLC (Oct. 1, 2021) (“Morningstar Letter”); Comment

Letter from James F. Tierney, Assistant Professor of Law, University of Nebraska College of Law (Oct. 1,

2021) (“Tierney Letter”); Pace University Letter; Comment Letter from Law Office of Simon Kogan, (Oct.

17, 2021) (“Kogan Letter”).

way that would apply to most DEPs and/or adopt additional regulations to address those risks.99

Many of these commenters suggested a need to address the standards of conduct applicable to

broker-dealers and investment advisers when interacting with retail investors through digital

platforms.100 Some of these commenters noted that Reg BI does not apply to firms with a selfdirected brokerage business model, including those that use DEPs101 and provided additional

See e.g., Comment Letter from Scopus Financial Group (Sept. 20, 2021); Comment Letter from Better

Markets, Inc. (Oct. 1, 2021) (“Better Markets Letter”); Comment Letter from Public Investors Advocate

Bar Association (Oct. 1, 2021) (“PIABA Letter”); Comment Letter from University of Miami School of

Law Investor Rights Clinic et al. (Oct 1, 2021) (“University of Miami Letter”); Comment Letter from

Fidelity Investments (Oct. 1, 2021); St. John’s Letter; Morningstar Letter. We also considered views

received from the SEC’s Investor Advisory Committee on ethical guidelines for artificial intelligence and

algorithmic models used by investment advisers. See Investor Advisory Committee, Establishment of an

Ethical Artificial Intelligence Framework for Investment Advisors (Apr. 6, 2023),

https://www.sec.gov/files/20230406-iac-letter-ethical-ai.pdf.

100

See e.g., Pace University Letter (“We believe that retail investors, particularly novice investors, believe that

they are receiving advice or recommendations from DEPs. This includes the top mover list, analyst ratings,

push notifications, and other DEPs that encourage investment activity. Many of our survey participants

stated that they believe that these DEPs influenced their decision-making. At the same time, DEPs may also

influence investor decision-making without investors being conscious of it.”); Comment Letter from North

American Securities Administrators Association (Oct. 1, 2021) (“NASAA Letter”) (“To assist with

compliance and to protect investors, the Commission should provide further guidance as to when DEPbased communications constitute recommendations. However, given the speed of technology, NASAA

suggests that guidance should not be limited to any particular DEP, but rather should be focused on the

effects of technologies on investor behavior generally.”); Comment Letter from Fiduciary Insights and

Practice Growth Partners (Sept. 30, 2021) (“Aikin/Mindicino Letter”) (“[A]s the complexity and

heterogeneity of wants, needs, and capabilities of the clientele rises, the sophistication and artificial

intelligence and machine learning (AI/ML) of the DEPs must increase dramatically. Commensurately, the

internal oversight and regulatory guardrails to assure that customer/client best interests are served must also

increase.”); see also Comment Letter from Morgan Stanley Wealth Management (Oct. 1, 2021) (“Morgan

Stanley Letter”) (while noting existing protections, stating that “[s]hould the Commission believe

additional guidance is necessary, we suggest the adoption of principles-based, technology neutral

adjustments to the existing regulatory regime to address the fast evolving technological landscape”); Better

Markets Letter; University of Miami Letter (“As the SEC continues its review of standards applicable to

financial professional[s], it is critical to enhance investor protection in the fast-growing and increasingly

harmful digital platform environment.”).

101

See e.g., Robinhood Letter (“The SEC acknowledged the benefits of a self-directed model such as

Robinhood’s in adopting Reg BI, explicitly stating that Reg BI does not apply to this model.”).

suggestions that the Commission could take to address firms’ use of DEPs.102 Others provided

detailed opinions as to the application of an investment adviser’s fiduciary duty to DEPs.103 A

significant number of commenters also addressed other laws and regulations and their

sufficiency, or lack thereof, in their application to DEPs, including discussion addressing (i)

antifraud and general standards of conduct;104 (ii) regulation of advertising, marketing, and

communications with the public;105 (iii) compliance and supervision obligations;106 (iv) data

privacy and cybersecurity concerns;107 (v) customer onboarding obligations;108 (vi) Commission

Staff’s 2017 Robo-Adviser Guidance;109 and (vii) the Advisers Act recordkeeping rule.110

102

See, e.g., Pace University Letter (“DEPs and online platforms have expanded access to the market to new

investors, while at the same time influencing the decision-making of those investors – particularly novice

investors – in ways that are often in conflict with their bests interest.”); see also Tierney Letter; Better

Markets Letter; SIFMA Letter; Morningstar Letter; Morgan Stanley Letter; University of Miami Letter

(“Due to the influential nature of DEPs, the SEC should enhance the Regulation Best Interest disclosure

obligation and conflict of interest obligation by requiring firms to flag investor trades and/or positions

where there is a likelihood that the firm will act in a manner adverse to the investor’s position and to notify

investors of these potential actions.”).

103

See e.g., IAA Letter (“Some advisers also use various analytical and technological tools to develop and

provide investment advice, including through online platforms or as part of enhancing their in-person

investment advisory services. Investment advisers may also engage in DEPs to develop and provide

investor education and related tools.”); see also Comment Letter from Envestnet Asset Management, Inc.

(Oct. 1, 2021) (“Envestnet Letter”); Comment Letter from Julius Leiman-Carbia, Chief Legal Officer,

Wealthfront Corporation (Oct. 8, 2021) (“Wealthfront Letter”); NASAA Letter; Aikin/Mindicino Letter;

Better Markets Letter; SIFMA Letter; University of Miami Letter; Morgan Stanley Letter.

104

See e.g., Comment Letter from Jennifer Schulp, Director of Financial Regulation Studies, Center for

Monetary and Financial Alternatives, CATO Institute (Oct. 1, 2021) (“CATO Institute Letter”); Comment

Letter from Brandon Krieg, CEO, Stash Financial, Inc. and Stash Investments LLC (Oct. 1, 2021) (“Stash

Letter”); Wealthfront Letter; IAA Letter; Robinhood Letter; SIFMA Letter; Tierney Letter.

105

See e.g., PIABA Letter; CATO Institute Letter; IAA Letter.

106

See e.g., Comment Letter from James J. Angel, Ph.D., CFP, CFA, Associate Professor of Finance,

McDonough School of Business, Georgetown University (Sept. 30, 2021); IAA Letter; Stash Letter;

Aikin/Mindicino Letter; PIABA Letter; CATO Institute Letter.

107

See e.g., NASAA Letter; Envestnet Letter; Kogan Letter.

108

See e.g., University of Miami Letter.

109

See e.g., Comment Letter from Penny Lee, CEO, Financial Technology Association (Oct. 1, 2021); IAA

Letter.

110

See e.g., Comment Letter from Pamela Lewis Marlborough, Managing Director and Associate General

Counsel, Teachers Insurance and Annuity Association of America (Oct. 1, 2021); SIFMA Letter;

University of Miami Letter.

Overview of the Proposal

In view of Commission staff observations, our experience administering our existing

rules, the discussion in section 1.B. above on the development of PDA-like technologies in firm

investor interactions and the unique risks they raise regarding conflicts of interest, and comments

received in response to the Request, we are proposing to update the regulatory framework to help

ensure that firms are appropriately addressing conflicts of interest associated with the use of

PDA-like technologies. Specifically, we propose that firms should be required to identify and

eliminate, or neutralize the effect of, certain conflicts of interest associated with their use of

PDA-like technologies because the effects of these conflicts of interest are contrary to the public

interest and the protection of investors.111

Proposed rules 15l-2 under the Exchange Act (17 CFR 240.15l-2) and 211(h)(2)-4 under

the Advisers Act (17 CFR 275.211(h)(2)-4) (collectively, the “proposed conflicts rules”) are

designed to address the conflicts of interest associated with firms’ use of PDA-like technology

when engaging in certain investor interactions, and the proposed rules would do so in a way that

aligns with (and in some respects may satisfy) firms’ existing regulatory obligations.112 Except as

specifically noted, the texts of proposed conflicts rule applicable to brokers and dealers (17 CFR

240.15l-2) and the proposed conflicts rule applicable to investment advisers (17 CFR

275.211(h)(2)-4) would be substantially identical.113 The proposed conflicts rules would only

apply where the firm uses defined covered technology—more specifically, an analytical,

111

See infra section II.A.2.e.

112

See id.

113

Citations herein to the “proposed conflicts rules” reference each of the proposed conflicts rules as they

would be codified in each location. Citations to a particular section of the CFR reference only the proposed

conflicts rule that would apply to broker-dealers or to investment advisers, as applicable.

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 in an investor interaction.

The proposal is designed to be sufficiently broad and principles-based to continue to be

applicable as technology develops and to provide firms with flexibility to develop approaches to

their use of technology consistent with their business model, subject to the over-arching

requirement that they need to be sufficient to prevent the firm from placing its interests ahead of

investor interests. The proposal is also designed to be consistent with the Commission’s prior

actions regarding technological innovation.114 We note that the staff has also provided their

114

Historically, the Commission has reviewed the changing technology landscape, provided guidance, and if

necessary amended its regulatory framework to protect investors while still allowing firms’ use of

technology to innovate and benefit investors. See, e.g., Use of Electronic Media for Delivery Purposes,

Release No. 7233 (Oct. 6, 1995) [60 FR 53458 (Oct. 10, 1995] (providing Commission views with respect

to the use of electronic media for information delivery under the Securities Act of 1933, the Securities

Exchange Act of 1934, and the Investment Company Act of 1940); Use of Electronic Media by BrokerDealers, Transfer Agents, and Investment Advisers for Delivery of Information, Exchange Act Release No.

37182 (May 9, 1996) [61 FR 24644 (May 15, 1996)] (“1996 Release”) (providing Commission views on

electronic delivery of required information by broker-dealers, transfer agents and investment advisers); and

Use of Electronic Media, Exchange Act Release No. 42728 (Apr. 28, 2000) [65 FR 25843 (May 4, 2000)]

(“2000 Release”) (providing interpretive guidance on the use of electronic media to deliver documents on

matters such as telephonic and global consent; issuer liability for website content; and legal principles that

should be considered in conducting online offerings). In addition, the Commission has amended regulations

to accommodate evolving technologies and changes in the way investors consume information. See, e.g.,

Tailored Shareholder Reports for Mutual Funds and Exchange-Traded Funds; Fee Information in

Investment Company Advertisements, Investment Company Act Release No. 34731 (Oct. 26, 2022) (87 FR

72758 [Nov. 25, 2022]) (requiring layered disclosure for funds’ shareholder reports and graphical

representations of fund holdings); Investment Adviser Marketing, Investment Advisers Act Release No.

5653 (Dec. 22, 2020) [86 FR 13024 (Mar. 5, 2021)] (adopting “principles-based provisions designed to

accommodate the continual evolution and interplay of technology and advice,” and providing specific

guidance regarding, among others, the use of social media). Further, the Commission has amended

regulations to expand the use of electronic filing options by investment advisers and institutional

investment managers and updated recordkeeping requirements to make them adaptable to new technologies

in electronic recordkeeping. See, e.g., Electronic Submission of Applications for Orders under the Advisers

Act and the Investment Company Act, Confidential Treatment Requests for Filings on Form 13F, and Form

ADV-NR; Amendments to Form 13F, Advisers Act Release No. 6056 (June 23, 2022) [87 FR 38943 (June

30, 2022)]; see also Electronic Recordkeeping Requirements for Broker-Dealers, Security-Based Swap

Dealers, and Major Security-Based Swap Participants, Exchange Act Release No. 96034 (Oct. 12, 2022)

[87 FR 66412 (Nov. 3, 2022)] (“Electronic Recordkeeping Release”).

views on the industry’s expanding use of technology in the context of robo-advisers115 and

shared examination findings and risks associated with the use of robo-advisory products,116

among other areas.

The proposal draws upon our authority under section 211(h) of the Advisers Act and

section 15(l) of the Exchange Act. The Dodd-Frank Wall Street Reform and Consumer

Protection Act of 2010 (“Dodd-Frank Act”) added section 211(h)(2) to the Advisers Act and

section 15(l)(2) to the Exchange Act, each of which, among other things, authorizes the

Commission to “promulgate rules prohibiting or restricting certain sales practices, conflicts of

interest, and compensation schemes for brokers, dealers, and investment advisers that the

Commission deems contrary to the public interest and the protection of investors.”117

The proposal is intended to be technology neutral. We are not seeking to identify which

technologies a firm should or should not use. Rather, the proposal builds off existing legal

standards and, as discussed throughout the release, is designed to address certain risks to

investors associated with firms’ use of certain technology in their interactions with investors,

regardless of which such technology is used.118 The proposal also is designed to permit firms the

115

See Robo-Advisers, Division of Investment Management Guidance Update No. 2017-02 (Feb. 2017)

(“2017 IM Guidance”), https://www.sec.gov/investment/im-guidance-2017-02.pdf (addressing among other

things, presentation of disclosures, provision of suitable advice, and effective compliance programs).

116

See Observations from Examinations of Advisers that Provide Electronic Investment Advice, Division of

Examinations Risk Alert (Nov. 9, 2021) (“2021 Risk Alert”), https://www.sec.gov/files/exams-eia-riskalert.pdf (noting, “[n]early all of the examined advisers received a deficiency letter, with observations most

often noted in the areas of: (1) compliance programs, including policies, procedures, and testing.”).

117

See Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111203, 124 Stat. 1376 (2010). As noted in note 8 to subsection (l), another subsection (l) is set out after the

first subsection (k) of the Exchange Act.

118

Firms’ use of PDA-like technology may also be subject to other potential legal and contractual restrictions

on the ability for advisers and brokers to collect and use customer information. See, e.g., 17 CFR part 248,

subpart A (Regulation S-P), requiring, among other things, brokers, dealers, investment companies, and

registered investment advisers to adopt written policies and procedures for administrative, technical, and

physical safeguards to protect customer records and information.

ability to employ tools that they believe would address these risks that are specific to the

particular technology they use consistent with the proposal. The Commission has long acted to

protect investors from the harms arising from conflicts of interests and will continually assess the

harms and revise those protections in light of the evolution of practices, including with regard to

firms’ use of technologies. As discussed in further detail below, conflicts associated with the use

of PDA-like technologies should be eliminated or their effects neutralized to protect investors

from conflicts of interest associated with firms’ use of PDA-like technologies that results in

investor interactions that place the interests of the firm and its associated persons ahead of

investors’ interests.

In particular, the proposed conflicts rules would generally require the following:

•

Elimination, or neutralization of effect of, conflicts of interest. The proposed

conflicts rules would require a firm to (i) evaluate any use or reasonably

foreseeable potential use by the firm or its associated person119 of a covered

technology in any investor interaction to identify any conflict of interest

associated with that use or potential use;120 (ii) determine whether any such

conflict of interest places or results in placing the firm’s or its associated person’s

interest ahead of the interest of investors; and (iii) eliminate, or neutralize the

effect of, those conflicts of interest that place the firm’s or its associated person’s

interest ahead of the interest of investors.

119

As used in this release, the term “associated person” means, for investment advisers, a natural person who

is a “person associated with an investment adviser” as defined in section 202(a)(17) of the Advisers Act

and, for broker-dealers, a natural person who is an “associated person of a broker or dealer” as defined in

section 3(a)(18) of the Exchange Act.

120

Covered technology, conflict of interest, investor interaction are each defined terms under the proposed

rules. See proposed rules 211(h)(2)-4(a) and 15l-2(a); see also infra sections II.A.1 and II.A.2.c.

•

Policies and procedures. The proposed conflicts rules would require a firm that

has any investor interaction using covered technology to adopt, implement, and,

in the case of broker-dealers, maintain, written policies and procedures reasonably

designed to achieve compliance with the proposed conflicts rules, including (i) a

written description of the process for evaluating any use (or reasonably

foreseeable potential use) of a covered technology in any investor interaction; (ii)

a written description of any material features of any covered technology used in

any investor interaction and of any conflicts of interest associated with that use;

(iii) a written description of the process for determining whether any conflict of

interest identified pursuant to the proposed conflicts rules results in an investor

interaction that places the interest of the firm or person associated with the firm

ahead of the interests of the investor; (iv) a written description of the process for

determining how to eliminate, or neutralize the effect of, any conflicts of interest

determined pursuant to the proposed conflicts rules to result in an investor

interaction that places the interest of the firm or associated person ahead of the

interests of the investor; and (v) a review and written documentation of that

review, no less frequently than annually, of the adequacy of the policies and

procedures established pursuant to the proposed conflicts rules and the

effectiveness of their implementation as well as a review of the written

descriptions established pursuant to the proposed conflicts rules.

Proposed amendments to applicable recordkeeping rules, rules 17a-3 and 17a-4 under the

Exchange Act and rule 204-2 under the Advisers Act, would require firms to make and keep

books and records related to the requirements of the proposed conflicts rules. These proposed

amendments are designed to help facilitate the Commission’s examination and enforcement

capabilities, including assessing compliance with the requirements of the proposed conflicts

rules.

The proposal is designed to prevent firms’ conflicts of interest from harming investors

while allowing continued technological innovation in the industry.

II.

DISCUSSION

Proposed Conflicts Rules

Scope

The proposed conflicts rules would apply only when a firm uses covered technology in an

investor interaction. The proposed definitions are designed to identify those conflicts of interest

that firms must evaluate to determine whether they result in investor interactions that place the

firm’s interest ahead of investors’ interest and must therefore be eliminated or their effect

neutralized.121 The proposed conflicts rules would apply to all broker-dealers and to all

investment advisers registered, or required to be registered, with the Commission.

Covered Technology

The proposed conflicts rules would define covered technology as 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.122 The proposed definition is designed to capture PDA-like technologies, such as

AI, machine learning, or deep learning algorithms, neural networks, NLP, or large language

121

See supra section I.B.4 (describing existing technologies that may involve conflicts of interest) and infra

section II.A.2.c (discussing the proposed definition of a conflict of interest).

122

Proposed conflicts rules at (a).

models (including generative pre-trained transformers), as well as other technologies that make

use of historical or real-time data, lookup tables, or correlation matrices among others.

The rate at which these technologies evolve has increased in recent years and may

continue to increase.123 Accordingly, the proposed definition of covered technology is also

designed to capture the variety of technologies and methods that firms currently use as well as

those technologies and methods that may develop over time. The proposed definition would

include widely used and bespoke technologies, future and existing technologies, sophisticated

and relatively simple technologies, and ones that are both developed or maintained at a firm or

licensed from third parties.124

The proposed definition, however, would be limited to those technologies that optimize

for, predict, guide, forecast, or direct investment-related behaviors or outcomes. The use of these

terms in the proposed conflicts rules is designed to capture a broad range of actions. This could

include providing investment advice or recommendations, but it also encompasses design

elements, features, or communications that nudge, prompt, cue, solicit, or influence investmentrelated behaviors or outcomes from investors. Investment-related behavior or outcomes can

manifest themselves in many forms in addition to buying, selling, and holding securities, such as

123

See e.g., Deloitte, Artificial intelligence: The next frontier for investment management firms (Feb. 5, 2019),

https://www.deloitte.com/global/en/Industries/financial-services/perspectives/ai-next-frontier-ininvestment-management.html (stating, for example, that “[f]irms have recognized a new opportunity to

gain direct distribution to investors, benefit from enhanced efficiencies in servicing small accounts, and

offer value-added services for advisors. This has translated into a wave of investment activity, with asset

managers and intermediaries acquiring or investing in robo-advice technology.”) See also Bob Veres and

Joel Bruckstein, T3/Inside Information Advisor Software Survey (Mar. 14, 2023),

https://t3technologyhub.com/wp-content/uploads/2023/03/2023-T3-and-Inside-Information-SoftwareSurvey.pdf.

124

The SEC has proposed a new rule under the Advisers Act to prohibit registered investment advisers from

outsourcing certain services or functions without first meeting minimum requirements. See Outsourcing by

Investment Advisers, Investment Advisers Act Release No. 6176; File No. S7-25-22 (Oct. 26, 2022) [87

FR 68816 (Nov. 16, 2022)] (“Proposed Outsourcing Rule”). We encourage commenters to review that

proposal to determine whether it might affect comments on this proposal.

an investor making referrals or increasing trading volume and/or frequency. This broad proposed

definition is designed to help ensure that, as innovation and technology evolve and firms expand

their reliance on technologies to provide services to, and to interact with, investors, our rules

remain effective in protecting investors from the harmful impacts of conflicts of interest.

The proposed definition would apply to the use of PDA-like technologies that analyze

investors’ behaviors (e.g., spending patterns, browsing history on the firm’s website, updates on

social media) to proactively provide curated research reports on particular investment products,

because the use of such technology has been shown to guide or influence investment-related

behaviors or outcomes. Similarly, using algorithmic-based tools, such as investment analysis

tools, to provide tailored investment recommendations to investors would fall under the proposed

definition of covered technology because the use of such tools is directly intended to guide

investment-related behavior. As an additional example, a firm’s use of a conditional autoencoder model to predict stock returns would be a covered technology.125 Similarly, if a firm

utilizes a spreadsheet that implements financial modeling tools or calculations, such as

correlation matrices, algorithms, or other computational functions, to reflect historical

correlations between economic business cycles and the market returns of certain asset classes in

order to optimize asset allocation recommendations to investors, the model contained in that

spreadsheet would be a covered technology because the use of such financial modeling tool is

directly intended to guide investment-related behavior. Likewise, covered technology would

125

An autoencoder return model is an unsupervised learning method that attempts to model a full panel of

asset returns using only the returns themselves as inputs. See generally S. Gu, B. Kelly, and D. Xiu,

Autoencoder Asset Pricing Models (Sept. 30, 2019), https://www.aqr.com/Insights/Research/WorkingPaper/Autoencoder-Asset-Pricing-Models.

include a commercial off-the-shelf NLP technology that a firm may license to draft or revise

advertisements guiding or directing investors or prospective investors to use its services.

The proposed definition, however, would not include technologies that are designed

purely to inform investors, such as a website that describes the investor’s current account balance

and past performance but does not, for example, optimize for or predict future results, or

otherwise guide or direct any investment-related action. Similarly, the proposed definition also

would not include a technology that predicts whether an investor would be approved for a

particular credit card issued by the firm’s affiliate based on other information the firm knows

about the investor because the use of such technology does not, and is not intended to, affect an

investment-related behavior or outcome. For the same reason, the use of a firm’s chatbot that

employs PDA-like technology to assist investors with basic customer service support (e.g.,

password resets or disputing fraudulent account activity) would not qualify as covered

technology under the proposed definition.

We request comment on all aspects of the definition of covered technology, including the

following items:

Is the scope of the proposed definition of a covered technology sufficiently clear?

We intend for the proposed definition to cover PDA-like technologies; are there

ways we could revise the proposed definition in order to better accomplish this?

Are there any technologies covered by the proposed definition that go beyond

PDA-like technologies and should be excluded? For instance, should the proposed

definition distinguish between different categories of machine learning

algorithms, such as deep learning, supervised learning, unsupervised learning, and

reinforcement learning processes? Do one or more of these categories present

more investor protection concerns related to conflicts of interest relative to other

categories? Would firms be able to identify what would and would not be a

covered technology for purposes of the proposed rules? If not, what additional

clarity would be beneficial? We have described examples of technologies to

which the definition would or would not apply. Should the definition be revised to

include or specifically exclude such examples?

Would the definition adequately include the technology used by firms that would

present the conflicts of interest and resulting risks to investors that these proposed

rules are designed to address? If not, how should this definition be changed to

further the objective of the proposed conflicts rules? Please explain your answer,

including the extent to which these technologies do or do not present conflicts of

interest risks to investors. Alternatively, do the technologies included in the

proposed definition include technology that does not typically result in risks to

investors that these proposed rules are designed to address?

Is the proposed definition of covered technology appropriately calibrated to allow

for future technological developments? What adjustments, if any, should the

Commission make to help ensure that the definition of covered technology will

remain evergreen despite future technological advancements? Conversely, what

adjustments to the definition of covered technology, if any, are necessary to avoid

covering those future technological advancements that do not possess

characteristics that the proposed rules are intended to address?

The proposed definition of covered technology only applies to technologies that

are used to optimize for, predict, guide, forecast, or direct investment-related

behaviors or outcomes. Do the terms “optimize for,” “predict,” “guide,”

“forecast,” and “direct” appropriately scope the definition? Is it clear what these

terms are intended to capture or would further explanation be helpful? Are there

certain technologies that would fit within one or more of those terms but which

should be outside the scope of the proposed definition? Alternatively, are there

certain technologies that would fall outside those terms but which should be

within the scope of the proposed definition? If so, should we use additional or

different words to clarify the meaning? For instance, should we include the term

“influence” in the definition? If so, how would “influence” differ from the terms

“guide” or “direct” in the definition? Should we use “nudge” or “prompt” in the

definition? Alternatively, should we remove any of the terms in the proposed

definition? For instance, are the terms “guide” and “direct” redundant or do they

express distinct meanings within the context of the definition? Does “guide”

capture broader activity than “direct” and cause the rule to capture technologies

that should not be in scope? Should the definition be limited to technologies that

direct or influence an investor?

Should the proposed definition of covered technology apply to technologies that

are used to optimize for, predict, guide, forecast, or direct investment-related

behaviors or outcomes, directly or indirectly? Are there certain PDA-like

technologies that optimize for, predict, guide, forecast, or direct investmentrelated behaviors or outcomes indirectly that should be covered by this definition?

If so, what are they and why? If the definition did include the term “indirectly,”

would it include technologies that should not be covered by the proposed conflicts

rules?

Should the definition of covered technology not include technology that is solely

meant to inform investors, as proposed?

Does the term “covered technology” adequately reflect the definition? Should

some other defined term be used, such as “covered processes” or “covered

methods”? Are there any other terms that should be used?

Does the phrase “investment-related behaviors or outcomes” sufficiently clarify

the intended scope of the rule and which technologies would not be within the

definition? Is it clear what the phrase “investment-related behaviors or outcomes”

would capture or would further explanation be helpful? Are there certain

behaviors or outcomes that may not be “investment related” but should

nonetheless be covered by the proposed definition? For instance, should PDA-like

technologies used for back office or administrative functions, such as trade

settlement, the routing of customers’ orders, accounting, or document review and

processing, be included in the covered technology definition? Are commenters

aware of any PDA-like technology that is used for back office functions, such as

the routing of customer orders, that is also used to engage or communicate with

investors (i.e., that involve an investor interaction)? Are there certain investmentrelated activities that may not be “behaviors or outcomes” that should be covered

by the definition? Is either “behavior” or “outcome” overbroad, capturing

activities beyond those intended by the definition? Should a different term, such

as “investment-related covered technology” be used?

Are there aspects of this definition that should be broadened, narrowed, revised,

removed, or added? For instance, should the definition be limited to the use of

predictive data analytics and/or artificial intelligence that optimizes for, predicts,

guides, forecasts, or directs investment-related behaviors or outcomes?

Alternatively, should we limit the scope of the definition to technologies that are

used to provide investment advice or recommendations? Should we otherwise

limit the scope to technologies that are used directly by investors? Should we

expressly exclude technologies that are not used by investors but instead are used

by individuals who are associated with a firm and use the technologies in

communicating with investors?

Investor Interaction

The proposed conflicts rules include definitions for both “investor” and “investor

interaction.”126 For brokers or dealers, the definition of investor would include a natural person,

or the legal representative of such natural person, who seeks to receive or receives services

primarily for personal, family or household purposes. The definition is designed to capture both

prospective and current retail investors.127 For investment advisers, the definition of investor

would include a client or prospective client, and any current or prospective investor in a pooled

126

See proposed conflict rules at (a).

127

See supra note 6. Broker-dealers are subject to regulation under the Exchange Act and SRO rules,

including a number of obligations that attach when a broker-dealer offers services to a retail customer,

including making recommendations, as well as general and specific requirements aimed at addressing

certain conflicts of interest. The application of these obligations can vary depending on a broker-dealer’s

business lines and activities, as well as the level of customer sophistication. See Regulation Best Interest,

Exchange Act Release No. 83062 (May 9, 2018) [83 FR 21574 (May 9, 2018)], at 21575 (“Reg BI

Proposing Release”); see, e.g., FINRA Rule 2210 (applying broker-dealer obligations related to

communications with the public differently to communications directed to retail versus institutional

investors). Here, the focus of the proposed rules for broker-dealers is on retail investors.

investment vehicle advised by the investment adviser.128 The use of PDA-like technology by

investment advisers of pooled investment vehicles, such as algorithmically targeted

advertisements that are designed to solicit investors in a pooled investment vehicle or

algorithmically designed investment strategies in pooled investment vehicles, present the same

investor protection concerns as advisers that use the same or similar technology to target or

advise their advisory clients. Accordingly, we are proposing to define “investor” so that the

proposed conflicts rules would broadly apply both to clients that receive investment advisory

services from an investment adviser and to investors in a pooled investment vehicle advised by

the investment adviser.129

The proposed conflicts rules would generally define investor interaction as engaging or

communicating with an investor, including by exercising discretion with respect to an investor’s

account; providing information to an investor; or soliciting an investor.130 This definition would

capture a firm’s correspondence, dissemination, or conveyance of information to or solicitation

of investors, in any form, including communications that take place in-person, on websites; via

smartphones, computer applications, chatbots, email messages, and text messages; and other

online or digital tools or platforms. This definition would include engagement between a firm

and an investor’s account, on a discretionary or non-discretionary basis. This definition would

also capture any advertisements, disseminated by or on behalf of a firm, that offer or promote

128

See proposed rule 211(h)(2)-4(a) (specifying that “pooled investment vehicle” has the same meaning as in

17 CFR 275.206(4)-8, meaning any investment company as defined in section 3(a) of the Investment

Company Act of 1940 or any company that would be an investment company under section 3(a) of that

Investment Company Act but for the exclusion provided from that definition by either section 3(c)(1) or

section 3(c)(7) of the Investment Company Act).

129

See proposed conflict rules at (a) (defining “Investor”).

130

See proposed conflict rules at (a).

services or that seek to obtain or retain one or more investors. The proposed definition is

intended to be sufficiently broad to encompass the wide variety of methods, using current and

future technologies, that firms could use to interact with investors.131

The proposed definition is generally designed to limit the proposed conflicts rules’ scope

to a firm’s use of covered technology in interactions with investors. This aspect of the proposed

conflicts rules recognizes that the conflicts associated with the use of covered technology in

investor interactions present a higher risk of harm to investors than conflicts associated with

technologies that are not used in such interactions. For instance, a firm could utilize covered

technology to analyze historical data and current market data to identify trends and make

predictions related to the firm’s intra-day liquidity needs, peak liquidity demands, and working

capital requirements. A firm could likewise use covered technology to make investment

decisions about its own assets. Similarly, a firm could implement covered technology for

automation of, for example, “back office” processes like the routing of customers’ orders132 and

accounting and trade settlement. In each of these examples, the use of covered technology for

these processes does not involve an investor interaction, and therefore would not be subject to

the proposed conflicts rules.

131

See generally Investment Adviser Marketing Release, supra note 19 (a recent Commission rule designed to

accommodate the continual evolution of the use of technology in the investment adviser industry as it

relates to advisers marketing their services to clients and investors).

132

Although routing of customers’ orders is not covered by this proposal, broker-dealers owe their customers a

duty of “best execution.” Best execution requires that a broker-dealer seek to obtain for its customer orders

the most favorable terms reasonably available in the market under the circumstances. See, e.g., Newton v.

Merrill, Lynch, Pierce, Fenner & Smith, 135 F.3d 266, 270 (3d Cir. 1998). See also Kurz v. Fidelity

Management & Research Co., 556 F.3d 639, 640 (7th Cir. 2009); Geman v. SEC, 334 F.3d 1183, 1186

(10th Cir. 2003); see also FINRA Rule 5310 (Best Execution and Interpositioning). The Commission

recently proposed a rule that, if adopted, would establish through Commission rule a best execution

standard for broker-dealers. See Regulation Best Execution, Exchange Act Release No. 96496 (Dec. 14,

2022) [88 FR 5440 (Jan. 27, 2023)].

In contrast, when a firm’s use or potential use of a covered technology in any investor

interaction could involve a conflict of interest, a firm would be subject to the framework of the

proposed conflicts rules. The proposed definition of investor interaction does not make any

distinctions based on the manner in which an investor or the investor’s account interacts with the

covered technology or on the manner in which the firm uses the technology in the interaction.

Meaning, “use” of covered technology in an investor interaction can occur directly through the

use of a covered technology itself (e.g., a behavioral feature on an online or digital platform that

is meant to prompt, or has the effect of prompting, investors’ investment-related behaviors) or

indirectly by firm personnel using the covered technology and communicating the resulting

information gleaned to an investor (e.g., an email from a broker recommending an investment

product when the broker used PDA-like technology to generate the recommendation).133

Unlike a purely ministerial or back office function, these examples involve an

investment-related communication with an investor and would be considered an investor

interaction under the proposed definition. Similarly, a firm may use covered technology to

provide individual brokers or advisers with customized insights into an investor’s needs and

interests and the broker or adviser may use this information to supplement their existing

knowledge and expertise when making a suggestion to the investor during an in-person meeting.

Such a scenario would result in the firm using a covered technology in an investor interaction

under the proposed rules. An investor interaction would also include firms’ use of game-like

133

To the extent a broker-dealer uses PDA-like technology to make a recommendation to a retail customer, the

broker-dealer would also be subject to Reg BI and its attendant obligations, including the Conflict of

Interest Obligation, as to the recommendation. Similarly, an investment adviser making a recommendation

to its client would also be subject to fiduciary obligations that include a duty of loyalty under which an

adviser must eliminate or make full and fair disclosure of all conflicts of interest. See Fiduciary

Interpretation, supra note 8.

prompts or marketing that “nudge” investors to take particular investment-related actions on

digital platforms. In addition, the investor interaction definition covers solicitations, for example,

a firm utilizing covered technology that scrapes public data, which the firm in turn uses to solicit

clients through broadcast emails.134

The proposed definition of investor interaction would include interactions that have

generally been viewed as outside the scope of “recommendations” for broker-dealers.135 For

example, under the proposed definition, an investor interaction could include: firms’ use of

research pages or “electronic libraries” to provide investors with the ability to obtain or request

research reports, news, quotes, and charts from a firm-created website; or firm’s use of

technologies to generate emails to investors as part of a firm-run email communication

subscription that investors can sign up for and customize, and which alerts investors to items

such as news affecting the securities in the investor’s portfolio or on the investor’s “watch

list.”136 Accordingly, the proposed definition would capture firm communications that may not

rise to the level of a recommendation, yet are nonetheless designed to, or have the effect of,

guiding or directing investors to take an investment-related action.

134

See infra section II.A.2.e (acknowledging that although a firm’s use of covered technology to solicit

investors to open an account falls under the definition of an investor interaction, it may not involve a

conflict of interest that would require elimination or neutralization under the proposed conflicts rules). On

the other hand, a conflict of interest may appear if a firm’s chatbot is programmed to solicit only investors

that scraped data show are heavy gamblers, and thus perceived as being more profitable to the firm as

investors that might invest in risky, high-profit investments that earn the firm more money relative to other

investments.

135

See NASD Notice to Members 01-23 (Apr. 2001) (Online Suitability—Suitability Rules and Online

Communications) (discussing the types of online communications may constitute “recommendations”

under the NASD suitability rule); Reg BI Adopting Release, supra note 8, at section II.B.2 (discussing

factors to consider when determining whether a “recommendation” has been made by a broker-dealer).

136

See NASD Notice to Members 01-23, id.

The proposed definition would exclude from the investor interaction definition

interactions solely for purposes of meeting legal or regulatory obligations.137 These interactions

are subject to existing regulatory oversight and/or do not involve the type of conflicts the

proposed rules seek to address. This exclusion would apply to interactions with an investor for

purposes of obligations under any statute or regulation under Federal or State law, including

rules promulgated by regulatory agencies. For example, the proposed definition would exclude

interactions with investors solely for anti-money laundering purposes, such as using PDA-like

technologies to identify and track investor activity for the purposes of flagging suspected

fraudulent transactions and requesting identification and verification of the transaction from an

investor (e.g., sending two-factor authentication messages).138 If a firm, however, includes as

part of such an interaction actions that are not reasonably designed to satisfy its obligations under

applicable law (e.g., circulating a link to a digital platform that includes features designed to

prompt investors to trade along with the annual delivery of Form ADV), and such additional

actions are otherwise within the definition of an investor interaction, then such action would be

considered an investor interaction for purposes of the proposed conflicts rules.

In addition, the proposed definition would also exclude interactions solely for purposes of

providing clerical, ministerial, or general administrative support. For example, the proposed

definition would exclude basic chatbots or phone trees that firms use to direct customers to the

appropriate customer service representative. This aspect of the exclusion is only intended to

137

See proposed conflicts rules at (a).

138

The activities covered under this legal and regulatory obligation exception would qualify as an investor

interaction that uses covered technology absent this exception. However, as a practical matter, many of

these activities would not involve a firm’s use of covered technology under the proposed definition,

because such activities would not involve an analytical, technological, or computation function, algorithm,

model, correlation matrix, or similar method or process (e.g., delivery of Form ADV or summary

prospectus pursuant to legal obligations).

cover basic or first-level customer support designed to efficiently answer simple questions like

providing the business hours of a branch office or the balance in the investor’s account, or to

guide the investor to a human representative in the appropriate department of the firm who is

trained to address the investor’s question. On the other hand, if a firm sought to employ a more

advanced chatbot designed to answer complex investment-related questions, such as when or

whether to invest in a particular investment product or security, this would no longer fit within

the exclusion for clerical, ministerial, or general administrative support, and would constitute an

investor interaction under the proposed definition.

In either case, the exclusions would be limited to interactions that are “solely for the

purpose” of the relevant category (or categories) of conduct in order to help ensure that

interactions that serve several purposes, including purposes that are not excluded, will be within

the scope of the definition of investor interaction.139 The “solely for the purpose” language is

designed to help ensure that all the functions of a dual-use technology like a chatbot would be

considered when evaluating conflicts of interest associated with use of the chatbot.

We request comment on all aspects of the proposed definitions of investor interaction and

investor, including the following items:

10.

For broker-dealers, the proposed definition of investor means a natural person, or

the legal representative of such natural person, who seeks to receive or receives

services from the broker-dealer primarily for personal, family or household

purposes. Should we narrow the definition of investor as applied to broker-dealers

139

Interactions that are for the purpose of both categories of conduct would also fit within the exclusion. For

example, an algorithm whose purpose was both to comply with legal or regulatory obligations and to

conduct other clerical, ministerial, or general administrative support functions would fit within the

exclusion so long as the algorithm did not also have a third purpose that was not excluded from the

definition.

to only cover retail customers, as defined under Reg BI? Should we expand the

definition of investor for brokers or dealers to cover all current and prospective

investors and not just retail investors? We have stated that investors may not be

able to understand the complexities of covered technologies and any conflicts

associated with their use. Should we expand the definition of investor for brokerdealers to cover a certain subset of non-retail investors? The proposed definition

of investor for investment advisers is not limited to services “primarily for

personal, family or household purposes.” Should we add such limitation in the

investment adviser conflicts rule?

11.

Should we narrow the definition of investor for investment advisers? For

example, should we only apply it to retail investors, as defined in Form CRS? If

so, please explain why in comparison to other rules under the Advisers Act.

12.

For investment advisers, the proposed definition of investor also includes

investors or prospective investors in a pooled investment vehicle that is a client or

prospective client of the investment adviser; should we retain this in the final

rules? Are there special considerations for investors in a pooled investment

vehicle that cause them to need less protection from conflicts of interest

associated with a firm’s use of covered technology? If the definition of “investor”

continues to include investors in pooled investment vehicles, as proposed, are

there certain structures or types of pooled investment vehicles that should not be

included? For example, should investors in collateralized loan obligation vehicles

be excluded? Are there unique characteristics of such vehicles, investors, or

investors in other pooled investment vehicles, which make the additional

protections that would be provided by the proposed conflicts rules unnecessary?

The proposed definition of “investor” would incorporate the definition of “pooled

investment vehicle” in rule 206(4)-8. Should we define the term “pooled

investment vehicle” (or use another term)? Should we define the term more

broadly for purposes of this rule to include other vehicles to which an investment

adviser may provide investment advice that rely on other exclusions from the

definition of investment company, such as companies primarily engaged in

holding mortgages that are excluded pursuant to section 3(c)(5)(C) of the

Investment Company Act, or collective investment trust funds or separate

accounts excluded under section 3(c)(11) of the Investment Company Act?

13.

Will the proposed definition of investors present challenges for firms that are

dually registered as investment advisers and broker dealers?

14.

Should we define “prospective investor” in the proposed rules? If so, how should

we define this term and why? For example, should we define “prospective

investor” as any person or entity that engages in some way with a firm’s services

(e.g., downloads the firm’s mobile app, visits the firm’s website, or creates a login)? If not, should we provide guidance regarding how firms can identify

prospective investors?

15.

Is the proposed definition of investor interaction sufficiently clear? Would firms

be able to identify what would be an investor interaction for purposes of the

proposed conflicts rules? Are there activities that are not covered by the proposed

definition of investor interaction that should be? Are there activities that are

covered by the proposed definition that should not be? For instance, should a firm

soliciting prospective investors be included within the definition? Should the

proposed definition be limited to interactions in which investors directly interact

with, or otherwise directly use, covered technology? Do situations in which

investors do not directly interact with covered technology raise the same concerns

of scalability as those in which investors do interact directly?

16.

Do commenters agree that investor interactions, as proposed, may entail conflicts

of interest that are particularly likely to result in investor harm or to take

additional effort to discern? Are there types of activities we should specifically

include or exclude within the definition?

17.

Do commenters agree that the definition of investor interaction should exclude

interactions solely for purposes of meeting legal or regulatory obligations or

providing clerical, ministerial, or general administrative support? Should we

remove any or all aspects of these exclusions from the definition in the final

conflicts rules? In the case of interactions solely for the purpose of meeting legal

or regulatory obligations, should we broaden or narrow the exclusion? For

example, should we take into account legal or regulatory obligations as a result of

compliance with foreign law, or with policies, rules, or directives of SROs

(including securities exchanges) or other bodies? Generally, would investor

interactions that fall under the proposed exclusions employ covered technology

(e.g., technologies that optimize for, predict, guide, forecast, or direct investmentrelated behaviors or outcomes)? If so, how? If not, is the exception for legal or

regulatory obligations additive? Is the exclusion for providing clerical,

ministerial, or general administrative support sufficiently clear? For instance, is it

clear this phrasing would capture trade settlement and the routing of customers’

orders or would further explanation be helpful?

18.

Do the proposed conflicts rules adequately address how a firm would treat a

single covered technology that features functions that are both included and

excluded from the investor interaction definition? For instance, a chatbot that is

used for both general customer support help (e.g., password resets) and to provide

more advanced functions, such as guiding an investor as to when and whether to

invest in a particular investment product. Should the proposed conflicts rules treat

these dual-purpose covered technologies differently than covered technology used

solely for purposes of meeting legal or regulatory obligations or providing

clerical, ministerial, or general administrative support?

19.

To the extent we retain or expand the exclusions, are there any conditions we

should add in order for a firm to be able to rely on particular exclusions? For

example, should we require that a firm create and maintain a written record if it

relies on an exclusion? Are there other activities that should be excluded? For

example, should we provide a more principles-based exclusion for certain

activities that the firm affirmatively identifies in writing as low-risk and that are

already part of existing compliance programs or subject to other laws, rules,

regulations, or policies?

20.

As specified in the proposed definition of investor interaction, the definition

would include discretionary management of accounts where the engagement is

with the investor’s account, even if there is no communication or other interaction

with investors themselves at the time of trades in their accounts. Should the

discretionary management of accounts be included within the definition of

investor interaction? Should it be excluded? Do commenters agree that a firm’s

discretionary management of accounts using covered technologies may entail

conflicts of interest that are particularly likely to result in investor harm and are

not sufficiently addressed under the current applicable legal framework? Why or

why not?

Identification, Determination, and Elimination, or Neutralization of the Effect

of, a Conflict of Interest

The proposed conflicts rules would require a firm to eliminate, or neutralize the effect of,

certain conflicts of interest associated with the use of a covered technology in investor

interactions.140 The proposed conflicts rules would also require firms to take affirmative steps as

a precursor to eliminating or neutralizing the effect of these conflicts. First, a firm would be

required to evaluate any use or reasonably foreseeable potential use of a covered technology in

any investor interaction to identify whether it involves a conflict of interest, including through

testing the technology. Second, a firm would be required to determine if any such conflict of

interest results in an investor interaction that places the interest of the firm or an associated

person ahead of investors’ interests. Third, the proposed conflicts rules would require a firm to

take a particular action—elimination or neutralization—to address any conflict of interest the

firm determines in step two results in an investor interaction that places its or an associated

person’s interest ahead of investors’ interests.141 The proposed conflicts rules thus supplement,

140

See infra section II.A.2.e.

141

On the application to interests of associated persons, see infra sections II.A.2.c, II.A.2.d, and II.A.2.e, and

proposed conflicts rules at (b)(2) and (3).

rather than supplant, existing regulatory obligations related to conflicts of interest, laying out

particular steps a firm must take to address conflicts of interest arising specifically from the use

of covered technologies in investor interactions.142 This is because the nature of these

technologies (for example due to their inherent complexity and ability to rapidly scale

transmission of conflicted actions across a firm’s investor base) requires additional steps to

address conflicts associated with their use in investor interactions, compared to conflicts of

interest more generally.

Evaluation and Identification

The proposed conflicts rules would require a firm to evaluate any use or reasonably

foreseeable potential use by the firm or its associated persons of a covered technology in any

investor interaction to identify any conflict of interest associated with that use or potential use.143

This requirement of the proposal, in connection with the requirement to test and periodically

retest any covered technology, is designed to help ensure that a firm has a reasonable

understanding of whether its use or reasonably foreseeable potential use of the covered

technology in investor interactions would be associated with a conflict of interest.

The proposed conflicts rules do not mandate a particular means by which a firm is

required to evaluate its particular use or potential use of a covered technology or identify a

conflict of interest associated with that use or potential use. Instead, the firm may adopt an

142

The elimination or neutralization requirement of the proposed rules applies only to a narrower, defined

subset of the broader universe of conflicts – those conflicts that a firm determines actually place the

interests of the firm or certain associated persons ahead of the interests of investors. This is in contrast to,

for example, an investment adviser’s fiduciary duty, which encompasses any interest that might incline the

adviser, consciously or subconsciously, to provide advice that is not disinterested., or similarly in contrast

to the broader universe of conflicts covered by Reg BI. Other conflicts of interest that only might affect the

firm’s investor interactions would continue to be subject to these other obligations, as applicable.

143

See proposed conflicts rules at (b)(1).

approach that is appropriate for its particular use of covered technology, provided that its

evaluation approach is sufficient for the firm to identify the conflicts of interest that are

associated with how the technology has operated in the past (for example, based on the firm’s

experience in testing or based on research the firm conducts into other firms’ experience

deploying the technology) and how it could operate once deployed by the firm. If a technology

could be used in a variety of different scenarios, the firm should consider those scenarios in

which it intends that the technology be used (and for which it is conducting the identification and

evaluation process). It should also consider other scenarios that are reasonably foreseeable unless

the firm has taken reasonable steps to prevent use of the technology in scenarios it has not

approved (for example, by limiting the personnel who are able to access the technology).

A firm could adopt different approaches for different covered technologies.144 Such

approaches could vary depending on the nature of the covered technologies employed by the

firm at the time they are implemented, how the technologies are used, and the firm’s plans for

future use of those technologies. For example, a firm that only uses simpler covered technologies

in investor interactions, such as basic financial models contained in spreadsheets or simple

investment algorithms, could take simpler steps to evaluate the technology and identify any

conflicts of interest, such as requiring a review of the covered technology to confirm whether it

weights outcomes based on factors that are favorable for the adviser or broker-dealer, such as the

revenue generated by a particular course of action.145 Even when a firm identifies a conflict of

144

Cf. U.S Chamber of Commerce Technology Engagement Center, Report of the Commission on Artificial

Intelligence Competitiveness, Inclusion, and Innovation (Mar. 9, 2023), at 82 (“Chamber of Commerce AI

Report”), https://www.uschamber.com/assets/documents/CTEC_AICommission2023_Report_v6.pdf

(calling for “impact assessments” to help categorize potentially harmful uses of certain technologies in a

risk-based framework).

145

See infra section II.A.2.d, discussing financial models.

interest associated with a simple covered technology, depending on the facts and circumstances,

it may determine that such conflict of interest does not actually result in the firm’s or an

associated person’s interests being placed ahead of those of investors, and that the conflict of

interest does not need to be eliminated or its effects to be neutralized.

Firms that use more advanced covered technologies may need to take additional steps to

evaluate technology adequately and identify associated conflicts adequately.146 For example, a

firm might instruct firm personnel with sufficient knowledge of both the applicable programming

language and the firm’s regulatory obligations to review the source co

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