The Securities and Exchange Commission’s proposal regarding the use of artificial intelligence is running into opposition from some financial industry trade groups, reports Financial Advisor.
In July, the SEC proposed new rules that would require broker-dealers and investment advisers to take certain steps to address conflicts of interest associated with their use of predictive data analytics and AI in order to prevent firms from placing their interests ahead of investors’ interests.
Under the proposal, firms would have to review their use of “covered technologies”, which were defined as “analytical, technological, or computational functions, algorithms, models, correlation matrices, or similar methods or processes that optimize for, predict, guide, forecast, or direct investment-related behaviors or outcomes of an investor.” Firms would have to determine whether its use of these technologies in investor interactions involves any conflict of interest and eliminate or neutralize the effect of any such conflicts.
During the public comment period, some trade groups including the Investment Adviser Association (IAA) and Securities Industry and Financial Markets Association (Sifma) have said that the SEC should withdraw the proposal for further study. They claim it would have a negative impact on investors as well as the industry itself.
Sifma president and CEO Kenneth E. Bentsen Jr. said the proposal would impose what he called unreasonable and unworkable requirements on brokers and financial advisers, and “would limit their ability to use technology to provide valuable information and services to their clients.”
The ERISA Industry Committee, which represents retirement plan sponsors, said the rule will increase costs associated with workplace retirement and financial wellness programs. Andy Banducci, senior vice president of retirement and compensation policy at the ERISA Industry Committee, wrote that “the practical effect is that plan participants will suffer. Financial firms could scale back on the information offered, resulting in less personalized, useful data from which workers can benefit. Alternatively, it seems likely that costs would increase in order to account for the myriad regulatory burdens imposed.”
The proposal to “eliminate or neutralize” conflicts marked “a significant departure from the existing regulatory framework, which appropriately gives advisers the ability to manage conflicts in numerous ways to ensure that they are acting in their clients’ best interest,” said Gail C. Bernstein, IAA general counsel. She called on the SEC to withdraw the measure and gather more information on emerging technologies before deciding on any further action.
At the time of the proposal, SEC Chair Gary Gensler pointed out the need for the new rules given the accelerating use of predictive data analytics, artificial intelligence, or similar technologies to interact with investors.
The attorneys at Hyman Cotter PC include former senior attorneys at the SEC whose legal experience and industry knowledge make them uniquely qualified to provide counsel on securities regulatory, compliance and enforcement matters. Our attorneys fully understand the regulatory scrutiny financial professionals and their firms face from the various regulators that oversee the financial services industry. If your firm is facing an investigation from a regulatory agency, please contact Hyman Cotter PC at 312-291-4600 or through our online contact form.
