SEC AI proposal would hurt retirement savers, industry group warns

A financial industry group Monday called on the SEC to withdraw a proposal targeting potential conflicts of interest related to the use of artificial intelligence by financial professionals because the regulation could harm retirement savers.

Under the rule proposal the Securities and Exchange Commission released in July, investment advisors and brokers who use artificial intelligence and predictive data analytics in interactions with clients and customers must “eliminate or neutralize” situations in which technology optimizes advisors’ or firms’ interests over those of the investor.

The rule would apply to “covered technology” that includes a firm’s use of “analytical, technological, or computational functions, algorithms, models, correlation matrices, or similar methods or processes that optimize for, predict, guide, forecast, or direct investment-related behaviors or outcomes of an investor,” the SEC said in a fact sheet.

The potentially wide reach of the rule has drawn widespread criticism across the financial industry. The ERISA Industry Committee, which represents retirement plan sponsors, said the rule would apply to a “vast swath of tools” that investors rely on daily, including those related to helping investors save for retirement.

“The proposed rule should be withdrawn,” Andy Banducci, senior vice president of retirement and compensation policy at the ERISA Industry Committee, wrote in a comment letter Monday.

The SEC rule would subject technology-based financial wellness programs for retirement plan participants to “broad new review and documentation requirements,” Banducci said in a related statement.

If the rule is implemented, financial firms will likely offer less useful information and “participating employees will have reduced access to financial wellness programs, which are likely to become less robust and useful over time,” Banducci said.

"The SEC benefits from robust engagement from the public and will review all comments submitted during the open comment period," an SEC spokesperson wrote in an email. "Generally, we respond to comments received as part of the final rulemaking and not beforehand."

SEC Chair Gary Gensler promoted the AI proposal at a July 26 open meeting where it was introduced.

"If the robo-advisor or brokerage app is using a function to optimize for its own interests and not solely for yours as an investor, therein lies a conflict,” Gensler said. “Investors deserve to be protected from predictive-data-analytics-driven interactions.”

The SEC will likely hear more entreaties to withdraw the proposal in other comment letters, which are due on Tuesday. 

“It is so far out of bounds, it’s more like a concept release than a rule proposal,” said Chris Iacovella, CEO of the American Securities Association, which represents regional financial firms. “There is nothing for the chairman to do other than throw it in the garbage.”

Morningstar Inc. will criticize the proposal in a comment letter it plans to file Tuesday. Aron Szapiro, head of government affairs at the investment research organization, said the measure is too expansive, as it tries to address gamification of online trading, AI and conflicts of interest.

“The problem is how they’re trying to solve widely disparate problems with a single, very broad rule,” Szapiro said. “The rule is a very big, blunt hammer. It’s hitting a lot of the wood in addition to the nails.”

In a recent letter to Gensler, 21 Republican members of Congress asserted that the AI proposal was intended to rewrite existing SEC regulations that address advisor conflicts of interest, such as Regulation Best Interest for brokers and fiduciary duty for advisors.

“If the SEC’s goal is to supplant Reg BI and the existing fiduciary standard with the proposal’s heightened ‘best interest’ standard, it should be transparent and direct about its actions,” wrote the GOP lawmakers, led by Reps. Ann Wagner (Mo.) and French Hill (Ark.) of the House Financial Services Committee. “It should not rely on the recent attention around predictive data analytics or artificial intelligence as a pretext.”

Reg BI requires brokers to disclose and mitigate conflicts of interest, while the AI proposal requires all advisors to eliminate or neutralize conflicts. Under fiduciary duty, investment advisors must disclose conflicts and if not eliminate them, disclose them to the point that an investor can give informed consent.

“They’re extending Regulation Best Interest, essentially making it more stringent,” said Jasmin Sethi, associate director of policy at Morningstar. Yet, what the SEC means by neutralizing a conflict "is not defined in the rule."

As an alternative to the AI proposal, the SEC might want to revisit Reg BI and its related interpretation of fiduciary duty under the Investment Advisers Act, Szapiro said. “It seems like providing clarity on Regulation Best Interest and the RIA guidance would make more sense.”