Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers

Abstract

In 2023, the U.S. Securities and Exchange Commission (“SEC” or “Commission”) proposed rules that would have required broker-dealers and investment advisers (collectively, “firms”) to eliminate, or neutralize the effect of, conflicts of interest arising from firms’ use of predictive data analytics (“PDA”) and similar technologies in their interactions with investors. The Commission withdrew the proposal in June 2025 without finalizing it, but the episode remains instructive: it was one of the first serious attempts by a securities regulator anywhere to regulate algorithmic and AI-driven conflicts of interest directly, and its reception illustrates both the promise and the pitfalls of that approach. This article situates the proposal within the broader use of PDA-like technologies in investment advice, examines its substantive provisions, and argues that the rule as drafted was overbroad, inadequately justified, and likely to harm investors, competition, and innovation more than it protected any of them. Drawing on comparative experience—including India’s Securities and Exchange Board’s (“SEBI”) more incremental approach of extending existing suitability and conflict-of-interest obligations to automated advice—the article argues that a narrower rule, tied to the specific risks of opaque, self-optimizing systems and harmonized with the Commission’s existing Regulation Best Interest and fiduciary-duty frameworks, would better serve investors than the Commission’s 2023 proposal did. The analysis is offered both as a critical account of a specific rulemaking effort and as a set of recommendations for regulators, in the United States and elsewhere, who revisit this question in the future.