SEC Proposes New Requirements to Mitigate Conflicts of Interest Associated With the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers

July 28, 2023

What Happened?

On July 26^th, 2023, the SEC proposed new rules that would require broker-dealers and investment advisers to take steps to mitigate conflicts of interest between the firm and its clients that result from the firm’s usage of predictive data analytics and similar technologies (“covered technologies”).

The SEC states a “covered technology” includes a broker-dealer or investment advisers’ “use of analytical, technological, or computational functions algorithms, models, correlation matrices, or similar methods or processes that optimize, predict, guide, forecast, or direct investment-related behaviors or outcomes of an investor.”

1. Identification, Determination, and Elimination, or Neutralization of the Effect of Conflict of Interest
   • A firm must review any current or future use of covered technologies in conjunction with investor interaction to identify conflicts of interest that might arise from that use and further evaluate if that conflict of interest puts their interest ahead of investors’ interest.
   • If it is identified that the firm’s interest is put ahead of the investors’ interest, the firm must eliminate or diminish the outcome of the conflicts of interest.
2. Policies and Procedures
   • If a firm does engage with covered technologies, policies and procedures must be in place to comply with the proposed rules. The policies and procedures should include detailed steps of the process to evaluate the use of a covered technology and how the effect of any conflicts of interest are eliminated or neutralized.
3. Recordkeeping
   • Books and records related to the proposed rules requirements would also have to be maintained.

Next Steps:

Broker-dealers and investment advisers should consider what changes would be necessary to comply with the proposed new rules as they would apply when a broker-dealer or investment adviser uses predictive data analytics or similar technologies during an interaction with an investor.

Fairview Cyber offers turnkey solutions that address SEC requirements for cybersecurity, and our team of regulatory experts are available to answer any questions you may have regarding the proposed rules. To learn more, visit our Cyber Solutions page or contact us if you’d like to speak to one of our regulatory experts.