WASHINGTON, D.C.— Legal Director and Securities Specialist Stephen Hall issued the following statement on the filing of Better Markets’ Comment Letter to the Securities and Exchange Commission (SEC) in response to the agency’s proposed rule to eliminate certain conflicts of interest associated with the use of predictive data analytics (PDA) and similar technologies that employ artificial intelligence (PDA-like technologies) by broker-dealers and investment advisers:
“Securities professionals have long promoted investments or trading strategies that maximize their profits at the expense of their clients. Now, a new species of conflict of interest has evolved through the increasingly prevalent use of advanced technology in the retail investment arena. The use of that technology may benefit retail investors in some ways, but it also threatens to create complex and hidden conflicts of interest. PDA-like technologies may harm investors if they lead to advice or recommendations that allow firms to benefit at investors’ expense. Regulators must guard against the risks that these technological innovations will cause investors harm.
“Conflicts of interest may arise from the use of PDA-like technologies in several ways. The algorithms that underlie these technologies may be programmed to prioritize what is best for the firm rather than investors. For example, the algorithm may prioritize investments that lead the firm to receive more compensation than it would have had the algorithm prioritized other investments. The use of PDA-like technologies can also generate conflicts of interest if firms use them to nudge users to trade more frequently on their platforms. The SEC’s proposed rule attempts to redress these problems by requiring that broker-dealers and investment advisers eliminate, or neutralize the effects of, the conflicts associated with their use of PDA-like technologies in investor interactions that place the firm’s interests ahead of investors’ interests.
“The SEC must reject industry’s attacks on the proposed rule. The rule requires only that broker-dealers and investment advisers not use technologies that, through artificial intelligence and machine learning, could lead to interactions with investors that would cause firms to prioritize their own interests over the interests of investors. The industry cannot dispute that such conflicts have no place in the securities markets, and all the proposed rule does is ensure that firms not use technology to avoid this basic principle of investor protection.”
Read our full comment letter here.
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Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies—including many in finance—to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit www.bettermarkets.org.
