Financial industry trade groups say the Securities and Exchange Commission’s artificial intelligence conflict-of-interest proposal will harm investors and advisors alike, and are calling on the agency to withdraw the initiative.
The proposal, which was issued in July, would require investment advisors and broker dealers to “eliminate or neutralize” conflicts of interest in all types of investor interactions and uses of technology.
SEC Chairman Gary Gensler said at the time the proposal was issued that the agency wanted to require that “regardless of the technology used, firms meet their obligations … not to place their interests ahead of investors’ interests.”
Gensler warned that because predictive data analytics and the use of artificial intelligence give investment firms a means to forecast and even direct investors’ investment decisions, “such conflicts could manifest efficiently at scale across brokers’ and advisers’ interactions with their entire investor bases.”
But trade groups including the Investment Adviser Association (IAA) and Securities Industry and Financial Markets Association (Sifma) said in comment letters that the proposal would harm the investors and industries the SEC seeks to protect.
“The proposed rules would impose unreasonable and unworkable requirements on brokers and advisers and would limit their ability to use technology to provide valuable information and services to their clients,” Kenneth E. Bentsen Jr., president and CEO of Sifma, said.
Gail C. Bernstein, the general counsel for the IAA, said that while the proposal focuses primarily on the use of emerging technology, including PDA and artificial intelligence, “it in fact captures virtually every tool or technology an adviser may use, including those that have been used for decades, such as hand-held calculators, software used for making financial calculations (i.e., spreadsheets), and even e-mail.”
Bernstein also called the proposed requirement to “eliminate or neutralize” conflicts “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.
The proposal “inexplicably introduces the new concept of ‘neutralization,’ an undefined term whose meaning is unclear,” she added.
Bentsen and Bernstein said that the proposals limitations would harm market efficiency, competition and investors.
Several groups also raised concerns that the proposal would raise costs for advisors and investors.
Bernstein said the SEC severely underestimates the economic impact of the proposal and the costs and burdens of the operational challenges that would be imposed on advisors, especially small firms.
“Even firms using simple technology would need to inventory every piece of technology used, including by third parties … then determine all the possible ‘investor interactions’ that could use the technology, and whether the identified conflict puts, or potentially could put, the firm’s interest ahead of existing or prospective clients…,” Bernstein said.
Bryan Corbett, president and CEO of the Managed Funds Association, said the proposal will harm markets, advisors and investors “by reducing the number of market participants and driving up the costs of investing.”
The IAA also argued that the SEC’s push for a “one-size fits-all,” overbroad and unproven framework to replace the existing principles-based fiduciary duty lacks Congressional authority.
The SEC should withdraw the proposal and instead “carefully study and gather more information regarding emerging technologies before determining whether additional action is warranted,” Bernstein argued.
The Investment Company Institute accused the SEC of trying to use the proposal to send the investment industry “back to the Stone Age.”
Whatever the intent of the agency, rolling back the clock on technological advancements would harm investor “the SEC should be seeking to help participate in our capital markets,” ICI President and CEO Eric Pan said.
