Industry accuses SEC of ‘outright hostile’ regulatory approach to technology

Industry trade organizations blasted the Securities and Exchange Commission's "continued war on technology" in a comment letter addressing a new SEC rule proposal.

Thirteen trade and industry groups, including the U.S. Chamber of Commerce, signed the Monday letter urging the SEC to withdraw its proposed rule, Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers.

"[T]he Proposal is outright hostile to the use of technology," the letter reads. "The onerous, and in some cases operationally unfeasible, requirements in the Proposal would likely make firms opt out of deploying technological innovations to avoid the prohibitive costs of compliance. The lack of discernible boundaries on what is a 'covered technology' is likely to operate as a de facto ban on the use of technology. This will harm competition in the markets and the investors the [SEC] seeks to protect."

The SEC proposed the rules July 25, explaining the need to "address conflicts of interest associated with [the] use of predictive data analytics and similar technologies to interact with investors to prevent firms from placing their interests ahead of investors’ interests."

The commission voted 3-2, with the Democratic majority winning out. The two Republican commissioners -- Hester Peirce and Mark Uyeda -- criticized the proposal as overly broad and potentially hampering progress.

"We live in an historic, transformational age with regard to predictive data analytics, and the use of artificial intelligence,” said SEC Chair Gary Gensler. “Today’s predictive data analytics models provide an increasing ability to make predictions about each of us as individuals. This raises possibilities that conflicts may arise to the extent that advisers or brokers are optimizing to place their interests ahead of their investors’ interests."

Concerned about the future

The SEC noted the rapid growth of artificial intelligence and other technologies in the world of financial advice. Potential exists for quick "scalability," the commission added in a news release, and broad audiences for the use of new technologies.

The industry is moving quickly to capitalize on the potential for AI and related technology.

"Building off existing legal standards, the proposed rules generally would require a firm to evaluate and determine whether its use of certain technologies in investor interactions involves a conflict of interest that results in the firm’s interests being placed ahead of investors’ interests," the commission said.

Firms would be required to eliminate or neutralize any conflicts, but firms would be permitted to employ tools that "they believe would address these risks and that are specific to the particular technology they use," consistent with the proposal, the release explained. The proposed rules would also require a firm to have written policies and procedures reasonably designed to achieve compliance with the proposed rules and to adhere to strict recordkeeping.

Letter: SEC has no authority

In its 15-page letter, industry groups claim the SEC lacks the statutory authority to enact the rule, which it claims conflicts with other rules already in place.

"[T]he Proposal does not account for the myriad of rules and regulations (other than the Standards of Conduct) that already require broker-dealers and investment advisers to identify and evaluate the covered conflicts of interest," the letter says. "Both broker-dealers and investment advisers have rules in place that require the conduct of annual risk assessments around conflicts of interest."

Complying with the SEC proposal would be difficult due to the nebulous definitions, the letter claims.

"The Commission has thrown a wide net over anything that could fall under the term 'covered technology' and that could remotely touch on an investor’s experience with a broker-dealer or an
investment adviser," the letter reads.

The comment period closes on Oct. 10.

Senior Editor John Hilton covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.