SEC Proposes Rules on the Use of Predictive Data Analytics

According to the SEC, investment advisers have a fiduciary duty to put the best interest of their client above theirs.

But when it comes to Predictive Analytics, powered by Artificial Intelligence technology, all bets are off.  This is one of the current concerns of the SEC leading to the recent proposal to implement regulation that addresses the use of Predictive Analysis and its risk to an adviser’s fiduciary duty to their clients.

The SEC has proposed rules that will require broker-dealers and investment advisers who use predictive analytics technology to take precautions to curb any conflicts of interest that can negatively impact their clients’ best interests.

Artificial Intelligence presents a myriad of tools that provide efficiency, speed, and the ability to analyze huge sets of data and make market predictions. This not only improves the accuracy of market predictions based entirely on quantitative data, it also decreases the likelihood of human error and bias.

However, governing agencies are wary that predictive analytic tools (AI) may indeed present conflicts of interest between advisers and investors.

Churning: The predictive data analyses capabilities of Artificial Intelligence combined with high frequency trading can lead to churning which may benefit investment advisers at the cost of the investors’ best interests.

Short Term Gains: Predictive Analytics models can be programmed to focus on short term gains, ignoring conservative investment strategies over immediate profit, a tactic that may negatively affect the investor.

The proposed rules will require firms to inform clients if and how predictive analytics tools are used by the firm, and any potential for conflicts of interest that may result from their use.

In addition, the proposed regulations address the matter of compliance, and would require advisers to maintain policies and procedures outlining their compliance practices.

The legal team at Jacko Law Group is closely monitoring the regulatory developments surrounding Artificial Intelligence and how broker-dealers and advisers utilize it, especially Predictive Analytics. We encourage our clients to implement best practices as soon as possible.

If you have questions regarding your firm’s compliance, feel free to reach out to our legal team at 619.298.2880.


Leave a Reply

Your email address will not be published. Required fields are marked *