# Conflicts of Interest

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URL: https://www.frixlaw.com/law-library/documents/agency%3Asec%3A757a96aabe6c9ce3

## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

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.
U.S. SECURITIES AND EXCHANGE COMMISSION

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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.

U.S. SECURITIES AND EXCHANGE COMMISSION

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3A757a96aabe6c9ce3. Public record. Not legal advice.