by Robin M. Bergen, Brant K. Brown, James R. Burns, Jennifer Kennedy Park, Rahul Mukhi, and Mohit Rathi
Robin M. Bergen, Brant K. Brown, James R. Burns, Jennifer Kennedy Park, Rahul Mukhi, and Mohit Rathi (photos courtesy of Cleary Gottlieb Steen & Hamilton LLP)
On July 26, 2023, the Securities and Exchange Commission (“SEC”) proposed new rules targeting the use of predictive data analytics and artificial intelligence (“AI”) by registered investment advisers (“RIAs”) and broker-dealers.[1] The new proposed rules focus on the potential for conflicts of interest and the possibility that newer, more complex analytics models (including those using AI) might optimize decision making for RIAs and broker-dealers by placing those firms’ interests above the interests of their clients.[2] The proposed rules would require RIAs and broker-dealers to: (i) evaluate whether their use of technologies “that optimize for, predict, forecast or direct investment-related behaviors or outcomes” create such a conflict of interest, and (ii) either stop using or address the effects of tools that place a firm’s interests before the interests of clients. RIAs and broker-dealers will also will be required to adopt policies to ensure compliance with the new proposed rules.[3]