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The Securities and Exchange Commission voted Wednesday to propose new rules targeting online stock brokers and other companies that use artificial intelligence and similar technologies to power interactions with their customers.
The rule proposals come in the wake of the 2021 GameStop
GME,
saga, after which U.S. regulators focused their attention on the tactics of online brokerages like Robinhood
HOOD,
the use of so-called gamification techniques to attract new customers and how new technologies could blur the line between an engaging user interface and investment advice.
See also: SEC’s Gensler warns of AI threat to financial markets, says effect will be as ‘transformative’ as the internet and Model T
“When the predictive data analytics and algorithms behind these apps are optimizing for investor interests, this can bring benefits in market access, efficiency, and returns,” SEC Chair Gary Gensler said in a speech last month.
“The use of predictive data analytics, however, also can lead to potential conflicts,” he added. “Conflicts may arise to the extent that advisers or brokers are optimizing for their own interests as well as others. Further, the underlying data used in these analytic models could be based upon data that reflects historical biases, affecting fair access and prices in the markets.”
Online trading applications have exploded in popularity in recent years, as they have lured investors with zero-commission policies and flash interfaces that some worry are overly seductive, causing some users to spend more time on them than is financially optimal.
The concern also comes amid a rapid increase in options trading among retail investors, which can be particularly lucrative for brokers.
The rules under consideration by the SEC Wednesday are limited and may not be the regulator’s last word on the subject. They would require broker-deals and investment advisers to evaluate their use of technologies that “that optimize for, predict, guide, forecast, or direct investment-related behaviors or outcomes of
an investor,” according to an SEC fact sheet published Wednesday.
Any broker that makes use of these technologies must identify whether the use of these technologies creates a conflict of interest, and where they exist adjust their products so that they don’t put the interest of the broker ahead of their customer.
The rule would also require affected firms to have written policies and procedures to guide employees in eliminating conflicts of interest and to keep records related to these requirements.
The public will have 60 days to comment following the proposal’s publication in the Federal Register. After the comment period, the SEC may amend the rule and vote for its final adoption.
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