Industry Pushback Against SEC's AI Regulation Proposals

Published 6 months ago

Financial industry representatives, including brokers, hedge funds, and investment advisors, are expressing significant opposition to the Securities and Exchange Commission’s (SEC) proposed regulations on the use of artificial intelligence (AI) in providing financial advice. The SEC’s proposals, announced in July, aim to mitigate conflicts of interest that may arise from the use of technology in advising clients.

A Wave of Opposition

The regulatory body has received a barrage of critical comments, extending beyond the initial deadline of October 10. Stakeholders have characterized the SEC’s approach as overly broad and potentially overreaching. Jesse Forster of Coalition Greenwich observes an unprecedented level of opposition to these proposed rules, which are part of the US’s ambition to lead in regulating AI technologies.

Presidential Action and Regulatory Concerns

President Joe Biden recently signed an executive order to coordinate over 25 government agencies in overseeing AI. SEC chair Gary Gensler has expressed concerns about AI’s potential to cause a financial crisis if not regulated promptly. The SEC’s proposals, known within the industry as “Reg PDA,” are intended to address the risks associated with the widespread application of AI in financial advice.

Critics, however, argue that existing regulations already protect investors adequately, and the new rules’ definition of technology is so expansive it could include basic tools like calculators. Furthermore, the industry contends that eliminating conflicts of interest, instead of merely disclosing them, would be an impractical standard to meet.

Gensler’s Rulemaking Spree

Under Gensler’s chairmanship, the SEC has introduced more rules than any time since the aftermath of the 2008 financial crisis, with many rules not directly stemming from congressional mandates. These include overhauls of various market segments and new regulations on asset custody and ESG investing.

Industry Feedback and Responses

The Securities Industry and Financial Markets Association (Sifma) has called for the complete withdrawal of Reg PDA, labeling it arbitrary and capricious. The Investment Company Institute, representing asset managers, has raised concerns about potential constitutional issues due to the proposed rule’s impact on adviser communications.

Prominent financial groups like Morgan Stanley and JPMorgan’s wealth and asset management divisions have sent individual letters to the SEC, reinforcing the positions held by industry groups. Citadel’s Stephen Berger has criticized the rules as being excessively broad and hostile towards technology.

SEC’s Position and Gensler’s Commentary

The SEC has stated that it values public engagement and will review all comments received during the comment period. Gensler, addressing industry concerns, emphasized the importance of protecting investors from biased recommendations driven by revenue-focused algorithms.

In summary, the financial industry is strongly challenging the SEC’s latest efforts to regulate AI’s role in financial advising, setting the stage for a contentious debate on the balance between innovation and investor protection.