Wagner, Hill, Rounds lead inquiry into SEC proposal

U.S. Reps. Ann Wagner (R-MO) and French Hill (R-AR) and U.S. Sen. Mike Rounds (R-SD) led their colleagues in requesting information about a proposal from the Securities and Exchange Commission (SEC) that they say could harm broker-dealers, investment advisors, and Main Street investors.

The SEC on July 26 proposed a new rule that would require broker-dealers and investment advisors, regardless of their size, to confront challenges posed by predictive data analytics and related technologies like artificial intelligence (AI).

The SEC’s proposed rule casts a broad net over what constitutes “covered technology,” encompassing any “analytical, technological, or computational function, algorithm, model, correlation matrix, or similar method or process that optimizes for, predicts, guides, forecasts, or directs investment-related behaviors or outcomes,” according to a Sept. 22 letter the lawmakers sent to SEC Chairman Gary Gensler.

“The proposal is misguided, unnecessarily broad, and threatens to harm both investors and our capital markets,” wrote the 21 lawmakers, who also included U.S. Reps. Andy Barr (R-KY), Bill Huizenga (R-MI), Frank Lucas (R-OK), Young Kim (R-CA), and Bryan Steil (R-WI).

Such a sweeping definition, they wrote, includes not only advanced technologies like AI, machine learning, and neural networks, but also basic tools that broker-dealers and investment advisors commonly employ in their operations. 

The compliance burden associated with these rules would be substantial, particularly for smaller firms striving to leverage technology for competitive advantages, they added.

“While it is promoted as an investor protection measure, the proposal’s true intention seems to be rewriting existing and well-functioning SEC regulations, such as Regulation Best Interest (Reg BI) and the fiduciary standard,” according to their letter. “This is likely to result in a burdensome, one-size-fits-all approach being imposed on all broker-dealers and investment advisers, irrespective of the technology they utilize.”

If the SEC’s goal is to replace Reg BI and the existing fiduciary standard with the proposal’s heightened “best interest” standard, they added, it should be transparent and direct about its actions and not rely on the recent attention around predictive data analytics or AI as a pretext. 

“Furthermore,” wrote the lawmakers, “if the SEC intends to assume the role of a technology regulator, it should seek explicit authority from Congress.”

They asked Gensler to answer several questions, including describing in detail the benefits provided to retail investors by various types of technology, as well as whether the SEC has statutory authority and is qualified to be a technology regulator.