To “protect Americans’ affordable access to financial markets,” two Republican senators have introduced legislation to block the Securities and Exchange Commission (SEC) from finalizing its proposed rule concerning the use of predictive data analytics by broker-dealers (BDs) and investment advisers (IAs).
U.S. Senate Commerce Committee Ranking Member Ted Cruz (R-Tex.) along with Sen. Bill Hagerty (R-Tenn.) on Feb. 6 introduced the two-page Protecting Innovation in Investment Act to essentially prevent the SEC from finalizing, implementing or enforcing its rule or any rule that is substantially similar.
The SEC on July 25 voted 3-2, along party lines, to propose new rules to address what it described as risks to investors from conflicts of interest associated with the use of predictive data analytics, artificial intelligence, machine learning and similar technologies. Under the proposal, BDs and IAs would be required to evaluate and determine whether their 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 proposal would also require a firm to eliminate or neutralize the effect of such conflicts associated with its use of covered technologies. Firms also would be required to have written policies and procedures designed to prevent violations and maintain records in relation to the rules.
At the time, the two Republican commissioners (Hester Peirce and Mark Uyeda), along with various industry stakeholders, criticized the proposal as being overly broad and potentially stifling innovation. That theme was picked up by Sens. Cruz and Hagerty, who argue that the proposed rule would strongly deter the use of technology in investing, just as innovation has paved the way for more options for Americans.
“By waging a war on technology, the SEC would hurt the very investors that it claims to be protecting — Americans saving for retirement,” Sen. Cruz said in a statement. “Our bill will halt this crusade in its tracks by making sure this rule never sees the light of day.”
“American consumers will ultimately bear the cost of yet another SEC attempt to overregulate financial markets,” added Sen. Hagerty. “The agency should demonstrate the ability to securely manage its own technology before seeking to micromanage and hinder innovative technologies at private firms. I’m pleased to join this legislation that would block the SEC from enacting this ill-conceived rule.”
The senators further contend that, while the title of the SEC’s rule mentions predictive data analytics, suggesting that it is targeting specific, cutting-edge technology, the definition of covered technology would include everything from simple spreadsheets to artificial intelligence (AI).
They further warn that, if implemented, advisors and brokers would need to “evaluate, test, and document all uses of technology in trading and client interactions to ensure conflicts of interests have been eliminated or neutralized, posing an enormous, and in some cases impossible, burden.”
At present, the SEC’s unified regulatory agenda shows a target period of April 2024 to finalize the rule.
