Page 3 - Investment Advisor - September 2023

09.23

NEW THIS MONTH @ THINkAdvISOr.cOM TechcenTer live evenTs web exTras direcTories blogs

SEC Floats New Rules on Digital Nudges, Robos

The Securities and exchange Gensler added that while such duct the proposal is trying to address.”
Commission recently approved a tools have the potential to offer The SeC’s plan regarding when invest-
set of proposed rules to tighten “greater financial inclusion ment advisors providing advisory ser-
the use of artificial intelligence by and enhanced user experi- vices over the internet can register with
investment advisors and broker- ence,” they also create the the SeC “would modernize the Internet
dealers by targeting “conflicts of potential for conflicts to arise Advisers exemption in two ways,” Gensler
interest” associated with the firms’ in which advisors or brokers explained. First, it would require advisors
use of predictive data analytics as it “are optimizing to place their inter- seeking to rely on the Internet Advisers
relates to certain investor interactions, ests ahead of their investors’ interests.” exemption “to have at all times an opera-
as well as new registration rules for so- The SeC’s plan, which will be out for tional, interactive website through which
called internet advisors. public comment, would require: the advisor provides digital investment
Under the SeC’s plan, broker-dealers • A firm to eliminate or neutralize the advisory services on an ongoing basis to
and advisors would be required “to take effect of conflicts of interest associated more than one client,” he said.
certain steps to address conflicts of inter- with the firm’s use of covered technolo- “That means, if the proposal is
est associated with their use of predictive gies in investor interactions that place adopted, firms that rely on the Internet
data analytics and similar technologies the firm’s or its associated person’s inter- Advisers exemption — thus being regu-
to interact with investors to prevent firms est ahead of investors’ interests lated by the SeC rather than state securi-
from placing their interests ahead of • A firm that has any investor interac- ties regulators — would actually need to
investors’ interests,” the agency said. tion using covered technology to have advise clients through the internet and
The proposed rules would apply when written policies and procedures reason- do so from the moment the firms rely on
a broker-dealer or an advisor “uses or ably designed to prevent violations of this exception. The website cannot be
reasonably foreseeably may use covered (in the case of investment advisors) or used as a prop, akin to how a man behind
technology in an investor interaction,” achieve compliance with (in the case of the curtain used props to pretend to be
according to a fact sheet released by the broker-dealers) the proposed rules the Wizard of Oz,” Gensler said.
agency. SeC Chairman Gary Gensler has • Recordkeeping related to the Second, the proposal would require
questioned when design elements and proposed rules advisors seeking to rely on the Internet
psychological nudges associated with dig- The plan is already drawing criti- Advisers exemption to provide advice to
ital engagement platforms (Deps) “cross cism. Gail bernstein, general counsel for clients “exclusively through this operation-
the line” and become recommendations. the Investment Adviser Association in al, interactive website,” Gensler continued.
Gensler said on July 26 that “today’s Washington, told Investment Advisor in an “Currently, the rule allows advisors to qual-
predictive data analytics models also pro- email that, based on a preliminary review ify as internet advisors while, for instance,
vide an increasing ability to make predic- and statements made by some of the also serving a small number of investors in
tions about each of us as individuals. This commissioners at the open meeting, IAA person, over the phone or by other means.”
growing capability facilitates being able “is deeply concerned about the proposed These changes, Gensler stated, “would
to differentially communicate to each rules around advisors’ use of technology.” better reflect what it means in 2023 truly
of us — and do so efficiently at scale. The plan, according to bernstein, “con- to provide an exclusively internet-based
How might we respond to individualized tinues a troubling pattern in the com- service.” The plan requires that internet
communications or nudges? How might mission’s approach to rulemaking in the advisors “have an operational, interactive
we respond to individualized product investment advisor space. The proposal website at the time of registration,” William
offerings? How might we respond to indi-
birdthistle, director of the SeC’s Division of
again appears not to identify and support
Adobe Stock vidualized pricing? This includes means with data the need for a new regulation, Investment management, said during the
seeming to dismiss existing regulatory
to optimize for, predict, guide, forecast, or
open meeting. (For more coverage of these
issues, see page 35.) — Melanie Waddell
obligations that already govern the con-
direct investors’ investment decisions.”
for all this and more Web exclusive content please visit thinkadvisor.com
INvESTMENT AdvISOr (ISSN 1069-1730) is published 7 times a year in February, April, June, July, September, November and December. ALM Global, LLC, 150 East 42nd Street, Mezzanine Level, New York, NY 10017.
Periodical postage paid at Covington, KY and additional mailing offices. Subscription Rate is $79 per year.
PoStMAStER: Send all subscription orders, changes of address and correspondence to Investment Advisor , Po Box 3136, Northbrook IL 60065. Allow four weeks completion of changes
September 2023 Investment AdvIsor 1