The US Securities and Exchange Commission (SEC) is on the verge of overhauling its regulatory framework, focusing on predictive data analytics and similar technologies. The two recently published proposals aim to safeguard investors’ interests and prevent conflicts of interest arising due to the increased use of these technologies by broker-dealers and investment advisers.
SEC’s regulation to balance technology and investor interests
The SEC’s regulatory changes are a response to investment firms’ rapidly increasing adoption of predictive technologies. While these technologies have the potential to boost market accessibility, efficiency, and returns, they can also lead to financial harm if firms prioritize their interests over those of their clients.
With these tools’ increasing reach and scalability, any potential conflicts can inflict widespread damage. The SEC proposes rules requiring firms to identify and evaluate potential conflicts of interest arising from using such technologies and take necessary steps to eliminate or mitigate their impact.
Gary Gensler speaks on protecting investors in the age of AI
Gary Gensler, the SEC Chairman, has underscored the transformative potential of predictive data analytics and AI in the modern age. He has argued that the proposed regulations will help protect investors from the conflict between technological tools and investor interests.
The proposed rules also stipulate that firms should develop risk management tools tailored to their specific technologies. Furthermore, they must maintain comprehensive regulations records and establish written policies to ensure compliance with the new rules.
Recent data underscore the increasing reliance of financial firms on AI for benefits. Notably, many traders consider ChatGPT, a sophisticated language synthesis tool, a trusted source for financial advice.
Revamping regulations for Internet-based investment advisers
Alongside the conflict of interest proposal, the SEC has also proposed amendments to modernize the regulations for investment advisers offering services exclusively online. As per the proposed changes, regulated parties using the Internet adviser registration rule must maintain an operational interactive website and provide ongoing digital advisory services to multiple clients.
The proposed amendments also seek to eliminate the ‘de minimis exception’ from the current rule, meaning that an internet investment adviser must advise all clients exclusively through an operational interactive website.
Reflecting on the changes since 2002, Gensler pointed out the need to adapt the regulations to align with modern technology and enhance the commission’s oversight efficiency over registered investment advisers.
Both proposals are now open for public comment for 60 days after publication in the Federal Register. The SEC’s initiatives underscore the evolving landscape of finance and the need to keep regulations updated in tandem with technological advancements. The aim is to protect investors and maintain the integrity of the financial market in the age of AI and predictive analytics.
