The Securities and Exchange Commission appears to be extending its timeline to issue a regulation governing how financial advisors and brokers can use artificial intelligence, predictive analytics, and other emerging technologies increasingly favored by wealth managers.
The commission Monday issued its updated regulatory agenda, indicating that it intends to gather more feedback on the AI rule and more than a dozen other proposals. A greater number of potential regulations are in the final stage of adoption.
Those include consequential rules for financial advisors concerning the use of outside contractors, cybersecurity, and disclosures around environmental, social, and corporate governance issues, or ESG.
The SEC has penciled each of those three rules in for finalization in October, though agencies aren’t bound by the timetables they set in their regulatory agendas, so a final rule could come earlier or later than the date they list.
“It’s not clear how many of these rules can be approved by the commission before the end of the year, although I think the SEC commissioners can push the RIA rules out the door by October,” says Duane Thompson, president of the legislative and regulatory consultancy Potomac Strategies.
The SEC is now indicating that the agency personnel who drafted the AI proposal and a pending rule on advisors who control clients’ assets are recommending the commission collect a second round of public comments later this year before moving to the final stage.
AI and investing. The current proposed rule on AI, predictive analytics, and other technologies would require advisors and other covered entities to establish a formal process for evaluating if those applications create conflicts of interest that could favor the firm’s profitability over the client’s investment portfolio, and then “eliminate or neutralize” those conflicts.
Critics of the proposal, including the two Republican commissioners at the SEC, have argued that the regulation would deter advisors from adopting technologies that could yield significant investor benefits. Further, industry groups have warned that the definition of a technology covered under the regulation is written so broadly that it could apply to tools almost as basic as a calculator.
The proposed revision of the SEC’s Custody Rule, formally known as the Safeguarding Advisory Client Assets proposal, would broaden the range of assets that trigger an advisor’s custody obligations. The updated regulatory agenda suggests that the commission could open that proposal to a second round of comments in the fall.
At the same time, the commission indicates that it could finalize a variety of rules later this year, including the outsourcing proposal, which would require advisors to conduct due diligence on any vendor they hire to conduct essential functions for the practice.
The cybersecurity proposal would require advisors to develop formal policies and procedures around deterring, detecting, and mitigating cyberattacks, and would compel firms to notify the commission in the event of a significant breach. That proposal, adopted in February 2022, could also be finalized this fall, according to the regulatory agenda.
The ESG proposal, also slated for potential adoption in October, would require advisors and asset managers to make enhanced disclosures about their investment practices in those areas. The idea is to create a more uniform, structured disclosure environment so investors can understand a fund or advisor’s real commitment to any ESG category and to prevent them from making misleading claims.
Chevron impact. The commission could enact those rules along with a bevy of proposals that would impact other areas of the securities industry, but they would all come in the wake of a landmark Supreme Court ruling which overturned what was known as “Chevron deference” and calls into question the authority of all federal agencies to write rules without explicit direction from Congress.
Thompson suggests that the commission could take a second look at some of its proposals in light of that case, though he points to a statement by SEC Chairman Gary Gensler as evidence the agency is committed to move forward with its agenda.
“We work to promote the efficiency, integrity, and resiliency of the markets,” Gensler says. “We do so to ensure the markets work for investors and issuers alike, not the other way around.”
Election looms. The political calendar is another variable. The SEC has advanced many of its proposals on party-line votes, and Republican members of Congress have frequently criticized Gensler’s agenda.
If Republicans control one or both chambers next year, “there will be an effort to overturn many of the SEC rules through a fast-track legislative process under the Congressional Review Act that’s becoming a routine procedure these days,” Thompson says.
“If the GOP sweeps in November and takes control of Congress and the White House, it will be a different story and you could see quite a few SEC and other Biden agency rules go into the dust bin.”
