A group of congressional Republicans is seeking answers from the Securities and Exchange Commission (SEC) on a proposed rule to prevent the use of artificial intelligence (AI) technologies by broker-dealers and investment advisers in ways that advance their interests ahead of those of their investor clients.
The proposal examines two central themes: what constitutes AI or other covered technology for purposes of such regulation, and does existing law effectively address the perceived harms or risks to be regulated?
The Republican lawmakers, including U.S. Reps. Ann Wagner (R-MO) and French Hill (R-AR) and U.S. Sens. Bill Hagerty (R-TN) and Mike Rounds (R-SD), said the SEC’s proposal will harm broker-dealers, investment advisors, and investors.
“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 and the fiduciary standard. 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,” the lawmakers wrote in a Sept. 22 letter to SEC Chair Gary Gensler.
“This new, untested standard would apply indiscriminately, whether or not firms provide personalized investment recommendations or advice to their customers… If the SEC’s goal is to replace Reg BI and the existing fiduciary standard with the Proposal’s heightened ‘best interest’ standard, it should be transparent and direct about its actions. It should not rely on the recent attention around predictive data analytics or artificial intelligence as a pretext. Furthermore, if the SEC intends to assume the role of a technology regulator, it should seek explicit authority from Congress,” the letter said.
One of the big issues for the Republicans is that the 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.”
They said this definition includes AI, machine learning, and neural networks as well as 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, they said.