The Securities and Exchange Commission (SEC), Wall Street's primary watchdog, is initiating a ban on investment firms exploiting artificial intelligence (AI) to increase business while disregarding customers' best interests.
This proposal is among the first federal endeavours to legislate for AI technology.
In response to the 2021 meme-stock saga, which drew regulatory concern over the investment platforms' deployment of game-like tactics encouraging excessive and risky trades by retail investors, the SEC has proposed this new rule.
App features, including vibrant graphics and behavioural prompts, were profitable for intermediaries but often not in the clients' best interests.
Currently, investment advisers are obliged to advocate decisions aligning with their clients' best interests. However, the proposed rule expands this requirement to online platforms, barring conflicts of interest related to features using personal data to guide user behaviour.
SEC Chair Gary Gensler emphasised the inherent conflict in optimising AI for investors and robo-advisor brokerage apps alike.
The proposed rule stipulates that firms must detect and eradicate potential conflicts of interest derived from their use of AI. Firms must also maintain written policies, procedures and records to prevent violations.
Opponents of the proposal, including Robinhood Markets Inc (NASDAQ:HOOD) chief brokerage officer, Steve Quirk, argue that the new rule may deter individual stock investments. Quirk suggested that the regulation would revert US financial markets to outdated practices, disadvantaging the new generation of retail investors.
The SEC's two Republican commissioners also criticised the proposal as overly broad and unnecessary, suggesting that the rule's ambiguity could inhibit Wall Street innovation.
Before the five-member commission votes on a final version, the public will have 60 days to provide feedback.