Recent Predictive Data Analytics SEC Rule Proposal Could Have Chilling Effect on the Industry

December 14, 2023

This year, we’ve seen a flurry of rule proposals from the SEC. In fact, the regulator has never been more active – which has created challenges for firms and investors.

One challenge is it leaves inadequate time to properly review and comment on all of the various proposals impacting the industry. Our rigorous process for developing thorough and thoughtful comments on proposed rules includes incorporating input from our members, who provide valuable insights based on your real-world experiences helping Main Street clients achieve their financial goals.

When there’s an influx of new proposals, it makes it challenging to gather meaningful input to share with regulators – especially when it is unclear how the requirements of each, which tend to shift during the rulemaking process, interact with one another.

A prime example is a proposal earlier this year concerning presumed conflicts of interest associated with data analytics tools. It follows the SEC’s request for information in 2021 about so-called digital engagement practices.

Back then, the Commission seemed intent on expanding the definition of what constituted a recommendation under Reg BI to include the use of AI-generated digital prompts by popular online brokerages like Robinhood. This proposal, however, goes much further than that. 

At a high level, it: 

  • Lacks a full understanding of how technological innovation in the industry has lowered investor costs and resulted in better client service. Instead, the proposal largely views technology only as a danger.
  • Supersedes current regulations and established legal standards, including Reg BI. In many instances, it directly contradicts past SEC guidance on how firms should address conflicts of interest. 
  • Goes beyond AI and machine learning tools. Covered technologies include anything that has the potential to influence investor behavior in any way, including an application as simple as an Excel spreadsheet.
  • Does not comply with the Administrative Procedures Act. It fails, among other things, to set forth a well-informed analysis of how markets operate, the likely effect of the proposal and why such changes are necessary and appropriate.

In light of all this, the ramifications could be enormous if the proposal gets finalized. 

For one, it would cost member firms and advisors an excessive amount of time and resources to implement and comply with the rule. Not only would that result in smaller margins, but advisors may be unable to provide the client experience they wish to offer.  

An even worse outcome is firms and advisors choosing to scale back their use of technology. Indeed, to avoid regulatory trouble, you could decide it’s not worth the risk. That, of course, would make your jobs far more complicated. But more than that, it could frustrate your clients, who have become accustomed to having access to the latest technology tools and platforms.  

Furthermore, FSI, along with the broader industry, is currently working to attract talent capable of serving the next generation of clients – nearly all of whom expect to utilize technology in all facets of their lives and work. The SEC’s utilization of an outdated framework and uninformed viewpoint could have a chilling effect on our collective effort. 

We have long supported commonsense regulations that offer investors a better experience and even advance the industry’s interest. But this is not what this latest proposal does. 

It represents a huge step backward, failing to increase investor protections and making it harder for firms and advisors to do business. In a recent comment letter we have respectfully encouraged the SEC to withdraw it and collaborate with the industry to develop a better understanding of the role technology plays in financial services.

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