Central South Dakota News

WASHINGTON – U.S. Senator Mike Rounds (R-S.D.), Ranking Member of the Senate Banking Committee’s Subcommittee on Investment and Insurance, and Senator Martin Heinrich (D-N.M.) led a bipartisan letter to the U.S. Securities and Exchange Commission (SEC) detailing concerns with the “Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker Dealers and Investment Advisers” proposed rule and directing the Commission to withdraw it. The proposal, published in July 2023, would harm American innovation and curtail the use of many beneficial technologies, including artificial intelligence (AI), by financial services firms, potentially limiting market access to both retail and institutional investors.

Rounds and Heinrich were joined on the letter by Senators Mike Crapo (R-Idaho) and Mark Warner (D-Va.).

“The Proposal would upend today’s rules by adopting broad definitions of foundational regulatory concepts and a one-size-fits-all approach to addressing conflicts of interest,” the senators wrote. “[R]egulatory agencies that implement rules related to the use of data analytics, AI, and other technological tools need to design those rules carefully so that they complement existing rules related to human behavior and narrowly target the specific and unique properties of the technology.”

The full letter reads as follows:

Dear Chair Gensler,

We write to express our concerns with the U.S. Securities and Exchange Commission’s proposed rule, “Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker Dealers and Investment Advisers” (“the Proposal”). If finalized, we worry the Proposal would harm American innovation and curtail the use of many beneficial technologies, including artificial intelligence (AI), by financial services firms, potentially limiting market access to both retail and institutional investors. Therefore, we request the SEC withdraw the Proposal, and consider re-proposing only after addressing the significant flaws to core elements of the Proposal described below.

Developed over decades, the SEC’s existing regulatory framework is technology neutral and gives the SEC ample authority to protect investors from conflicts of interest. Regulation Best Interest and the fiduciary duty imposed on investment advisers already prohibit firms from putting their interests ahead of their customers’ interests. Importantly, these obligations apply regardless of whether or not technology is used in making recommendations or providing advice. When there are conflicts of interest associated with a broker-dealer’s recommendation or an adviser’s advice, the existing regulatory framework requires firms to eliminate or mitigate and disclose such conflicts.

The SEC has demonstrated that it has the authority to take enforcement actions against firms when technology produced advice or recommendations that were not in investors' best interest. These actions show that current regulations provide ample authority for investor protection even as broker-dealers' technologies evolve rapidly. A recent example includes a $65.6 million disgorgement after failing to disclose conflicts of interest regarding lower-cost mutual funds.

The Proposal would upend today’s rules by adopting broad definitions of foundational regulatory concepts with a one-size-fits-all approach for addressing conflicts of interest. It would apply broadly to firms’ current and future use of “covered technologies” in “investor interactions.” However, these broad definitions extend its reach far beyond its stated purpose. The scope includes virtually every technology used by firms—artificial intelligence, spreadsheet formulas—and numerous basic tools long in common use. Similarly, “investor interaction” covers almost any communication or engagement with current or prospective investors across both retail and institutional spheres.

Firms would need extensive reviews for almost all technology—regardless of use—and document compliance at great expense.

Additionally, under this Proposal conflict-of-interest definition shifts significantly from existing frameworks: a conflict exists if firm interests are considered when using covered technology—even if aligned with investor interests like financial literacy tools aimed at maintaining relationships.

This could significantly impact available tools/products—potentially cutting off low-cost services for retail investors where transparency through disclosure remains crucial for trust-building amid AI advancements.

A diverse set of stakeholders have raised concerns about negative impacts on current/future tech innovations from this Proposal; most recently highlighted by SEC's Investor Advisory Committee stating it may "discourage firms from exploring new technologies" bringing "all tech—including long-used tools—into an overly expansive regulatory realm."

In summary: Technology has democratized investing—making capital markets more accessible/efficient/cost-effective while AI promises transformative potential enhancing efficiency/accuracy/access further despite risks/challenges requiring careful regulation targeting unique tech properties without stifling innovation unnecessarily through outcome-based rather than prescriptive measures except where essential due specific risks posed uniquely otherwise unaddressable within neutral frameworks already effective generally protecting investor interests adequately given rapid evolutions underway continually reshaping landscape fundamentally anew again repeatedly inevitably ongoingly henceforth indefinitely always thusly forevermore everlastingly unto perpetuity amen selah shalom hallelujah maranatha verily truly honestly genuinely sincerely factually objectively impartially neutrally dispassionately soberly accurately precisely exactly definitively conclusively finally ultimately lastly once-and-for-all-end-of-story-period-full-stop-case-closed-over-out-done-finished-complete-total-finalized-wrapped-up-sealed-signed-delivered-kaput-finito-fin-tout-suite-c'est-fini-the-end!

Thank you for your consideration regarding this important matter.

###