SEC Mulls Regulating the Use of AI by Brokers and Advisers

Wall Street’s top watchdog is considering regulating the use of AI by brokers and investment advisers.

The Securities and Exchange Commission (SEC) is mulling rules that would cover the use of AI, machine learning, predictive data analytics and similar technologies.

“Technology, markets, and business models constantly change,” SEC Chair Gary Gensler said in a statement. “Thus, the nature of the SEC’s work must evolve as the markets we oversee evolve.”

The goal is to avoid conflicts of interest in customer interactions, which could inherently arise with the use of certain emerging technologies.

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Gensler has said that when an adviser provides investment advice to a client and uses predictive data analytics, “do those algorithms optimize for the investor’s interests, and place the investor’s interest in front of the adviser’s own interests?”

“Alternatively, are they optimizing in part for the adviser’s interests? I believe this may lead to conflicts relating to how they use predictive data analytics and individually tailored investment engagement.”

He cited the use of robo-advisers, brokerage apps and wealth management apps whose algorithms “narrowly target each consumer with specific marketing, pricing and nudges.”

If these algorithms nudge the consumer into investing in securities that maximize profits for the adviser, it could fall afoul of an adviser’s fiduciary duty to seek what’s best for the client, which is the law.

The AI regulation proposals are part of the U.S. Office of Management and Budget’s Spring 2023 Unified Agenda of Regulatory and Deregulatory Actions by the Office of Information and Regulatory Affairs.