Financial Industry Urges SEC to Withdraw AI Proposal


Last week, a group of 14 trade associations has asked the SEC to withdraw its proposed rule on investment advisers’ and broker dealers’ use of artificial intelligence, saying the rule “illustrates the Commission’s continued war on technology”.  Others have also criticized the SEC’s potential rule on the use of AI.

Trade Associations Up in Arms

In a comment letter written on September 11th, 2023 a group of 14 trade associations, including the Alternative Investment Management Association, American Investment Council, American Securities Association, Investment Company Institute, Insured Retirement Institute, the Financial Services Institute, Managed Funds Association, and U.S. Chamber of Commerce, among others argue that the SEC’s proposal to regulate AI in the financial markets is “unnecessary, inadequately reasoned and fatally flawed proposal” and “is outright hostile to the use of technology.”

This SEC rule, issued on July 26th proposes that advisers and broker-dealers eliminate conflicts of interest that arise from their use of “predictive data analytics” – defined as any technology that uses “analytical, technological, or computational functions, algorithms, models, correlation matrices, or similar methods or processes that optimize for, predict, guide, forecast, or direct investment-related behaviors or outcomes of an investor.”

One of the major concerns raised by the trade associations is that the SEC’s proposal includes a “lack of discernible boundaries” on what technologies qualify as “predictive data analytics”.  Consequently, they fear that this lack of clarity will function “as a de facto ban on the use of technology.”

Another key point made by the trade groups is their view that the SEC lacks the legal authority to require advisers to eliminate conflicts of interest.  They argue that traditionally advisers and broker-dealers have only been required to mitigate and disclose conflicts of interest rather than eliminate them altogether.

Lastly, the trade associations suggest that the SEC’s proposal on the use of AI does not account for “interconnectedness and interdependencies with other pending proposals.”

Consequently, the trade groups argue that, “The commission should withdraw the proposal and 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.”

Opponents on Capitol Hill

The SEC’s proposal on the use of AI by investment advisers and broker-dealers has also garnered a few opponents on Capitol Hill.  At a hearing Tuesday before the Senate Committee on Banking, Housing and Urban Affairs, Senator Tim Scott, R-South Carolina, said “Despite it being labeled a rule on artificial intelligence, your power grab to regulate emerging technologies, even Excel spreadsheets, is beyond the SEC’s scope and will ultimately stifle innovation.”

Senator Mike Rounds, R-South Dakota, also said that the proposal would create a “restrictive regulatory regime that will govern any analytics tool and is inconsistent with decades of legal and commission precedent regarding the handling of conflicts of interest.”

Senator Cynthia Lummis, R-Wyoming asked SEC Chairman Gensler whether he would re-propose the rule in the face of the criticism presented by the Committee.  Genlser said that the Commission takes all public comments on their proposals seriously.

Our Take

As we said in response to the SEC’s initial proposal on the use of AI by the financial services industry, our biggest concern about the proposal is that it is extremely broad, and in some ways redundant.  In addition, we don’t see a proposal that is adaptable to the dynamic nature of AI technology.  As a result, we felt the SEC’s proposed rule could actually stifle innovation and the use of technology – an outcome that could actually harm investors.

Clearly, a broad range of professionals within the financial services industry were equally concerned about the SEC’s proposed rule, and they raised a number of valid issues about it.  The big question is how the SEC will respond to the rather severe industry backlash to their first attempt at addressing the issues surrounding the use of artificial intelligence by the financial markets?  Only time will tell.


About Author

Mike Mayhew is one of the leading experts on the investment research industry. In addition to founding Integrity Research, Mike is on the board of directors of Investorside Research Association, the non-profit trade association for the independent research industry, and a frequent speaker on research industry trends and developments. Mike has over thirty years of research industry experience. Email:

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