SEC Chair Gensler Defends Predictive Data Proposal

SEC Chair Gary Gensler argued that a recent SEC proposal requiring firms to analyze and eliminate conflicts arising from the use of predictive data analytics in investor interactions is consistent with the existing standards of Regulation Best Interest ("Reg BI").

In a speech before the SEC Investor Advisory Committee, Chair Gensler recognized the "transformative" impact of predictive data analytics models and artificial intelligence to address financial inclusion and enhance user experience. He addressed the conflicts of interest likely to arise when a firm's predictive data optimization function takes the interest of the firm into consideration as well as the interest of the investor. Under the SEC's proposal, firms "would need to identify any such conflicts that result in an investor interaction that places the firm's interests ahead of investors' interests," and that "firms then would need to eliminate or neutralize the effects of those conflicts." He argued that this proposal reflects the same standard as required by Reg BI "to brokers when they make recommendations to retail investors or to advisers" and "under our interpretation of fiduciary duty under the Investment Advisers Act of 1940—when they provide investment advice."

Chair Gensler said that the proposal was designed in response to these conflicts concerns, stressing that firms are responsible to act in the investor's best interest beyond mere disclosure. (See previous coverage.)

The SEC Chair also emphasized the importance of financial literacy. He said that investors, especially self-directed ones, need to comprehend the nature and extent of risks when engaging with such complex products.