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IAA Statement: Predictive Data Analytics

October 10, 2023

IAA VP of Communications & Marketing Janay Rickwalder.

The Investment Adviser Association is calling on the SEC to withdraw its recent proposal regarding potential conflicts of interest associated with the use of predictive data analytics and other covered technologies (PDA).

If adopted, the proposal would undermine the principles-based fiduciary duty under the Investment Advisers Act of 1940, which has served as the bedrock principle of investor protection for over 80 years. Moreover, the proposal is contrary to the interests of investors. And it imposes infeasible challenges and unwarranted costs and burdens on advisers, especially smaller advisers.

The IAA has several significant concerns with the proposal, including for example:

  • The proposal is unnecessary because management of conflicts is effectively covered by the fiduciary duty, which requires advisers to act in their clients’ best interest at all times and not put their own interests ahead of those of their clients. The SEC recently reaffirmed these fundamental principles in its comprehensive 2019 interpretation regarding the fiduciary duty.
  • The Proposal would attempt to establish a new, “one-size fits-all,” overbroad, and unproven framework at the expense of the principles-based fiduciary duty. We also question whether Congress has granted the SEC such expansive authority.
  • While the proposal focuses primarily on the use of emerging technology, including PDA and artificial intelligence, it in fact captures virtually every tool or technology an adviser may use, including those that have been used for decades, such as hand-held calculators, software used for making financial calculations (i.e., spreadsheets), and even e-mail.
  • The proposal would stifle innovation and disincentivize the beneficial use of emerging technology designed to help and educate investors.

Given these and other concerns discussed in our letter, the IAA believes that the proposal is inherently flawed.

The IAA recommends that instead of prematurely pursuing new rulemaking relating to emerging technology, the SEC carefully study the risks and promise for investors of emerging technology, including artificial intelligence and machine learning, through outreach and public forums.  For example, the SEC has held numerous roundtables in the past to address emerging business practices and risk and should do the same here.  We would welcome the opportunity to work with the SEC as it studies these issues.

The IAA’s letter is linked here.

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