In July 2023, the U.S. Securities and Exchange Commission published a proposed rule that, if adopted as proposed, will have significant impacts for investment advisers and broker-dealers interacting with investors through covered technology.

The proposed rule defines “covered technology” as an analytical, technological, or computational function, algorithm, model, correlation matrix, or similar method or process that optimizes for, predicts, guides, forecasts, or directs investment-related behaviors or outcomes. The proposed definition is designed to capture predictive data analytics (PDA)-like technologies, such as AI, machine learning, or deep learning algorithms, neural networks, NLP, or large language models (including generative pre-trained transformers), as well as other technologies that make use of historical or real-time data, lookup tables, or correlation matrices among others.

A conflict of interest exists when an investment adviser uses a covered technology that takes into consideration an interest of the investment adviser, or a natural person who is a person associated with the investment adviser.

An investor means any prospective or current client of an investment adviser or any prospective or current investor in a pooled investment vehicle advised by the investment adviser. An investor interaction means engaging or communicating with an investor, including by exercising discretion with respect to an investor’s account; providing information to an investor; or soliciting an investor.

The proposal would require investment advisers to:

• assess the use, or potential use, of "covered technology" in investor interactions for conflicts of interest. If such conflicts prioritize the firm’s or its associated person’s interests, they must be eliminated or neutralized;
• adopt and implement written policies and procedures reasonably designed to achieve compliance with the proposed rules. These policies should cover the evaluation of "covered technology" use, disclose material features of any "covered technology" used in any investor interaction and associated conflicts, address situations where conflicts may favor the firm or associated person, outline steps to mitigate these conflicts, and undergo annual reviews for adequacy and effectiveness; and
• maintain, make and retain certain books and records related to the requirements of the proposed rules.

If you would like to read more about the requirements under this proposal, you can access our August 11, 2023 summary of the proposal.

This rule proposal was formally withdrawn by the SEC on June 12, 2025.  If the SEC wants to proceed with a rule in this area in the future, it will publish a new proposing release.

Please contact James Delaney with any questions regarding this proposal.

• 

  James Delaney

  Managing Director, Asset Management Regulation