Senate bill would block SEC rule to regulate technology in financial services

Image shows stop signs in front of the SEC building. — A proposed SEC rule on technology would stifle innovation, a pair of senators say.

By John Hilton

A pair of Republican senators say an SEC proposal to better regulate the use of artificial intelligence in financial services will end up stifling innovation instead.

As a result, Sens. Ted Cruz, R-Texas, and Bill Hagerty, R-Tenn., yesterday introduced the Protecting Innovation in Investment Act. The bill would block a Securities and Exchange Commission rule from taking effect.

In July 2023, the SEC proposed the controversial rule, titled the Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers. Thirteen trade and industry groups, including the U.S. Chamber of Commerce, rallied opposition and fired off a letter urging the SEC to withdraw the rule.

"[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 trade groups got the attention of the senators, who brought a new level of attention to the SEC rule with their bill. Cruz and Hagerty say the rule threatens Americans’ affordable access to financial markets.

“American consumers will ultimately bear the cost of yet another SEC attempt to overregulate financial markets,” Hagerty said in a statement. “The agency should demonstrate the ability to securely manage its own technology before seeking to micromanage and hinder innovative technologies at private firms.”

Partisan issue

The SEC proposed the rule 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."

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.

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.

InsuranceNewsNet 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.

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.