Experts Voice Concern Over SEC’s AI Rule

The Securities and Exchange Commission’s contentious predictive data analytics regulatory comment period ended on October 10, and industry participants highlighted concerns about the proposed rule.

Since its release in July, the proposal has received nearly 100 comments from industry participants. It would require broker-dealers and investment advisors to identify and eliminate or neutralize conflicts of interest that may arise when using predictive data analytic technology, such as artificial intelligence.

While some industry trade groups and legal consultants have criticized the rule for being overly broad and prescriptive, several of the industry’s largest custodians expressed their own worries ahead of the deadline.

Charles Schwab General Counsel Peter Morgan argued in a letter to the Commission last week that the regulation, as written, would be “vulnerable to legal challenges,” and that it would raise free-speech concerns due to its control over technology-assisted communications.

In a separate letter, Fidelity Investments encouraged the Commission to scrap the draft rule, claiming it was “fatally flawed” and had an “unworkable” structure.

Some of the industry’s largest broker-dealers voiced their concerns as well

Commonwealth Financial Network stated that the proposal would limit the number of resources that its firm and its advisors could use without incurring significant expenses, even though a number of those resources “have been successfully utilized by firms and investors for years without regulatory concerns.”

Morgan Stanley expressed its concerns about the rule’s unforeseen repercussions for clients and investors.

“Even well-resourced firms may be challenged to shoulder the implementation and ongoing operational burdens that compliance with the Proposed Rules will necessitate, and many firms, regardless of resourcing, may be discouraged to innovate under the Proposed Rules,” Morgan Stanley’s general counsel wrote.

The new uptick in concerns follows continuing opposition to the proposal from industry participants. More than a dozen members of Congress blasted the SEC last month for using the proposed regulation as a trial-balloon for an established norm across broker-dealers and investment advisors.