IAA Opposes SEC Predictive Data Analytics Proposal
October 10, 2023
Today, the IAA submitted a comment letter to the SEC requesting that the agency withdraw its proposed rules regarding potential conflicts of interest associated with the use of predictive data analytics and other technologies by advisers in investor interactions. If adopted, the proposed rules would, among other things, require firms to either “eliminate or neutralize the effect of” certain conflicts of interest associated with using covered technologies in investor interactions, broadly defined to include existing and prospective clients.
As expressed in our letter to the SEC, the proposed rules are unjustified and unnecessary, and would in fact be contrary to the interests of investors.
Specifically, we argue that the proposed rules would:
- Without justification, effectively replace the robust fiduciary duty principles for managing conflicts of interest with clients – principles that have been in place and worked well for decades – with an unproven and questionably expansive regulation. We also question whether Congress has granted the SEC such expansive authority;
- Unnecessarily duplicate principles-based regulations adopted under the anti-fraud provisions of the Advisers Act that already govern interactions with investors (e., the new Marketing Rule), and require advisers to adopt and implement prescriptive compliance policies and procedures;
- Impose costly and burdensome compliance, testing, and recordkeeping obligations that are operationally infeasible due to overly expansive defined terms covering virtually every tool used in almost every interaction between an adviser and investors, including both existing and prospective clients;
- Have the unintended consequence of impeding beneficial and important communications between an adviser and its clients and limiting clients’ ability to control the contours of their relationship with their advisers;
- Stifle innovation and the beneficial use of emerging technology, contrary to the interests of investors; and
- Severely underestimate the significant economic impact, including the cumulative costs and burdens that would be imposed on advisers, particularly smaller advisers.
Our letter recommends to the SEC that instead of prematurely pursuing new rulemaking relating to emerging technology, it carefully study the risks and promise for investors of emerging technology, including artificial intelligence and machine learning, through outreach and public forums. We also expressed our willingness to work with the SEC as it studies these issues.
We appreciate the efforts of the many IAA members who helped us develop our response to the Proposal. We especially extend our gratitude to Jennifer Klass and Matthew Rogers, with IAA associate member K&L Gates, for their assistance with this matter.
If you have any questions regarding the SEC’s proposal, or would like to discuss any other issue with a member of the legal team, please contact us at IAALegalTeam@investmentadviser.org.