SEC’s Predictive Data Analytics Rule Will Help Prevent Abusive AI Practices that Hurt Retail Investors

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WASHINGTON, D.C.—Director of Securities Policy Benjamin Schiffrin issued the following statement on the filing of Better Markets’ Supplemental Comment Letter to the Securities and Exchange Commission (SEC) regarding its proposed rule to require securities firms to eliminate certain conflicts of interest associated with their use of predictive data analytics:

“The use of artificial intelligence in the securities industry has allowed firms to exploit predictive data analytics, digital engagement practices, and gamification features to induce investors to trade excessively. Firms use data that they gather on investor behavior to deliver prompts, nudges, and cues that are designed to encourage investors to keep trading. The SEC’s rule proposal is designed to prevent firms from using technology in a way that benefits the firm but harms investors—including by leading investors to engage in excessive trading and become addicted to trading, which can destroy their careers, finances, and lives.

“These concerns are not theoretical. Two months ago, Robinhood paid a $7.5 million fine to settle allegations by Massachusetts’ securities regulators that it used game-like features to lure inexperienced investors into harmful trading activity. The SEC’s rule would require firms to eliminate or neutralize the conflicts that arise from their use of sophisticated technology.

“The SEC must reject the criticisms that existing rules address conflicts of interest, that it should require only the disclosure of conflicts of interest that the use of these technologies create, and that its rule proposal covers overly broad uses of technology. Existing rules are not sufficient to prevent firms from using sophisticated technology to turn retail investors into investing addicts. A disclosure-based regime would leave investors exposed to predatory behavior on the part of firms with greater insight into the technologies that they use and the ability to tailor the disclosures in a way that would prevent investors from protecting their own interests. And there is nothing overly broad about requiring that firms that use technological advancements ensure that they do not do so in a way that prioritizes their own interests over the interests of the investors they are supposed to serve.”

You can find the comment letter here and you can learn more about the challenges facing regulators from AI in finance in our recent fact sheet.

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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.

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