Conflicts of Interest

FACT SHEET

Conflicts of Interest

and Predictive Data

Analytics

The Securities and Exchange Commission proposed new rules and amendments to address

certain conflicts of interest associated with the use of predictive data analytics by broker-dealers

and investment advisers (“firms”) in investor interactions. The proposal would require:

●

A firm to eliminate or neutralize the effect of conflicts of interest associated with the firm’s

use of covered technologies in investor interactions that place the firm’s or its associated

person’s interest ahead of investors’ interests;

●

A firm that has any investor interaction using covered technology to have written policies

and procedures reasonably designed to prevent violations of (in the case of investment

advisers) or achieve compliance with (in the case of broker-dealers) the proposed rules;

and

●

Recordkeeping related to the proposed conflicts rules.

Why This Matters

Firms have accelerated their use of certain newer technologies, such as predictive data

analytics, artificial intelligence, or similar technologies. When the use of these technologies

is optimized for investor interests, it can bring benefits in market access, efficiency, and

returns. To the extent that firms use these technologies to optimize in a manner that places

their interests ahead of investor interests, investors can suffer harm. Due to the scalability

of these technologies and the potential for firms to reach a broad audience at a rapid speed,

any resulting conflicts of interest could cause harm to investors in a more pronounced

fashion and on a broader scale than previously possible. This proposal would require specific

protections to compliment those already required under existing regulatory frameworks to

better protect investors from harms arising from these conflicts.

How These Rules Would Apply

The proposed rules would apply when a broker-dealer or an investment adviser registered

or required to be registered under section 203 of the Investment Advisers Act of 1940 (or, in

each case, its associated persons) uses or reasonably foreseeably may use covered

technology in an investor interaction.

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FACT SHEET | Conflicts of Interest and Predictive Data Analytics

“Covered technology” includes a firm’s use of analytical, technological, or computational

functions, algorithms, models, correlation matrices, or similar methods or processes that

optimize for, predict, guide, forecast, or direct investment-related behaviors or outcomes of

an investor. The proposal generally would apply to a firm’s use of a covered technology to

the extent it is used in connection with the firm’s engagement or communication with an

investor, including by exercising discretion with respect to an investor’s account, providing

information to an investor, or soliciting an investor.

What Would Be Required

A conflict of interest under the proposed rules generally would exist when a firm uses a

covered technology that takes into consideration an interest of the firm or its associated

persons.

The proposed rules and amendments 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. Firms

would be required to determine whether any such conflict of interest places or results in

placing the firm’s or its associated person’s interest ahead of investors’ interests. Finally, the

proposed rules would require a firm to eliminate or neutralize the effect of any conflicts of

interest that place the firm’s or its associated person’s interest ahead of investors’ interests.

The proposal would also require a firm that has any investor interaction using covered

technology to have written policies and procedures reasonably designed to achieve

compliance with the proposed rules. The policies and procedures would require, among

other things, a written description of the process for evaluating any use (or reasonably

foreseeable potential use) of a covered technology in any investor interaction and 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 rule to result in an investor

interaction that places the interest of the firm or an associated person ahead of the interest

of investors. In addition, firms would have to make and keep books and records related to

the requirements of the proposed rules.

Additional Information:

Visit sec.gov to find more information about the proposal and the full text of the proposed rules. The comment

period will be open for 60 days following publication of the proposing release in the Federal Register.

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