SEC’s proposed rules on predictive data analytics: Regulatory overreach or necessary safeguard?

Rick Steves

“The Proposed Rules would impose unreasonable and unworkable requirements on brokers and advisors and would limit their ability to use technology to provide valuable information and services to their clients. These impractical limitations would harm market efficiency, competition, and investors.”

In a move that has been met with significant controversy, the Securities and Exchange Commission (SEC) has proposed new rules aimed at eliminating or neutralizing the use of predictive data analytics (PDA) and similar technologies by Broker-Dealers (BDs) and Registered Investment Advisers (RIAs).

These proposed rules have been met with strong criticism from industry groups, particularly from the Securities Industry and Financial Markets Association (SIFMA) and its Asset Management Group (SIFMA AMG).

The SEC’s proposals would introduce a framework for conflicts elimination or “neutralization” on interactions between BDs and RIAs with investors. This could potentially overhaul the existing regulatory environment under which these financial institutions operate. As part of the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940, the Proposed Rules encompass both advisory relationships and arms-length communications.

“Unreasonable and unworkable requirements on brokers and advisors”

In a scathing response, SIFMA has submitted a letter to the SEC strongly advising against the adoption of this proposed framework. SIFMA President and CEO Kenneth E. Bentsen, Jr., criticized the move, stating, “The Proposed Rules would impose unreasonable and unworkable requirements on brokers and advisors and would limit their ability to use technology to provide valuable information and services to their clients. These impractical limitations would harm market efficiency, competition, and investors.”

SIFMA and SIFMA AMG, in their letter, outline several key areas of concern, notably:

The existing regulatory framework for investor communications is already robust, reasonable, and effective, making new rules superfluous.
The new rules are an unnecessary burden, not just in terms of compliance but also for other uses of technology unrelated to the SEC’s specific concerns.
The requirements would impose substantial burdens that could undermine beneficial investor interactions and advisory practices.
“The Proposed Rules do not reflect a reasoned approach and for that reason should not be adopted,” reads the letter.

Critics argue that the SEC has failed to provide adequate justification for the proposed rules, specifically questioning the lack of evidence supporting a significant risk to investors. The SIFMA letter argues that “The Proposing Release fails to provide any rational basis for concluding that the existing, robust regulatory regime is insufficient.”

The breadth of the Proposed Rules raises significant concerns about their practicability. As SIFMA points out, the rules are “fundamentally flawed in design and unworkable in practice,” as they would “prevent a vast array of beneficial investor interactions and advisory practices.”

SIFMA argues that the rules would not only hamper market efficiency but also inhibit competition. According to Bentsen, “These impractical limitations would harm market efficiency, competition, and investors.”

While regulatory oversight is necessary to ensure market integrity and protect investors, industry experts warn that an overreaching framework could stifle technological advancements. For instance, PDA-like technologies have been influential in providing insights for investment strategies. The Proposed Rules might impede the use of such technologies, thereby affecting the quality of services provided to clients.

Will the SEC take a step back?

While the SEC’s intentions may be rooted in enhancing investor protection, the approach has ignited a debate that places it under scrutiny for potential regulatory overreach. As stakeholders grapple with the proposed changes, the regulatory landscape for BDs and RIAs stands at a critical juncture. It remains to be seen whether the SEC will take the industry’s concerns into account or proceed with regulations that could fundamentally alter how financial markets operate.

For now, SIFMA and other industry groups stand united in urging the Commission to reconsider its approach. As the SIFMA letter concludes, “We would be happy to discuss more suitable ways to address the Commission’s concerns about uses of PDA-like technologies, but the Proposed Rules are too imprecise and logically flawed to be a constructive starting point for developing appropriate regulation.”

Time will tell if this heated disagreement will result in compromise or set the stage for a regulatory standoff that could have long-lasting impacts on the financial industry.

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