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Industry Groups Bash SEC’s “Continued War on Technology”

Industry Groups Bash SEC’s “Continued War on Technology” .Adviser, broker, broker-dealer, financial services, investment adviser, RIA, SEC, Securities Exchange Act of 1934, Investment Advisers Act of 1940, Conflicts of Interest Associated with the Use of Predictive Data Analytics, Vanessa Countryman, David T. Bellaire, Financial Services Institute Inc., Anya Coverman, Institute for Portfolio Alternatives, Tom Quaadman, U.S. Chamber of Commerce

Fourteen advocacy associations representing various aspects of the financial services industry voiced their strong opposition this week to the SEC’s proposed rule, Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers.

In a letter to Securities and Exchange Commission secretary Vanessa Countryman, calling it “outright hostile to the use of technology” and illustrative of “the Commission’s continued war on technology.”

In July 2023, the Securities and Exchange Commission proposed new rules under the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940 to eliminate, or neutralize the effect of, “certain conflicts of interest associated with broker-dealers’ or investment advisers’ interactions with investors through these firms’ use of technologies that optimize for, predict, guide, forecast, or direct investment-related behaviors or outcomes.”

According to the SEC, firms’ use of predictive data analytics-like technologies can bring benefits in market access, efficiency, and returns. Specifically, to the extent that firms are using PDA-like technologies “to optimize for their own interests in a manner (intentionally or unintentionally) that places these interests ahead of investor interests, however, investors can suffer harm.”

Further, due to the scalability of these technologies and the potential for firms to reach a broad audience at a rapid speed, any resulting conflicts of interest could supposedly cause harm to investors in a “more pronounced fashion and on a broader scale than previously possible.”

The Commission is also proposing amendments to rules that would require firms to make and maintain certain records in accordance with the proposed conflicts rules.

Among the signatories to the letter objecting to the proposed rule are David T. Bellaire of the Financial Services Institute Inc., Anya Coverman, from the Institute for Portfolio Alternatives and Tom Quaadman of the U.S. Chamber of Commerce.

The letter requests that the Commission withdraw the proposal, calling it “unnecessary, inadequately reasoned and fatally flawed.”

The associations argue that the proposal would make it more difficult for regulated institutions to enhance their systems and to find efficiencies for their customers and clients, that it exceeds the statutory authority granted by Congress because it extends beyond investment recommendations or advice to investors, and that the proposed rule does not account for interconnectedness and interdependencies with other pending proposals.

The letter also claims that the Commission has vaguely defined anything that could fall under the term “covered technology” and that could remotely touch on an investor’s experience with a broker-dealer or an investment adviser. While the Commission states it is purportedly “limited” to technologies that “predict, guide, forecast, or direct investment-related behaviors or outcomes,” the letter states that there is no limit to the breadth of this proposal.

Rather, the groups urge the SEC to “engage with market participants to better understand the use of technology by firms, and how firms holistically handle conflicts of interest to determine the necessity of further regulation in this area.”

Comments on the proposal will be received until Oct. 10, 2023.

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