Page 37 - Investment Advisor - September 2023

The Playing Field

By Melanie Waddell

the seC’s new AI Plan expands reg BI — and More

industry attorneys say the plan would impose potentially burdensome

conflict-of-interest requirements on broker-dealers and advisors.

hile industry officials are to consider the plan, SEC Commissioner
busy digesting the Securities Hester Peirce, a Republican, asked:
Wand Exchange Commission’s “Given the application of this rule to
recently passed plan to address conflicts investor interactions, rather than mere-
when broker-dealers and advisors use ly recommendations, do we have the
artificial intelligence and predictive data authority to apply it to broker-dealers?
analytics, they are questioning whether Is it a backdoor attempt to expand
the agency’s plan expands Regulation Regulation Best Interest?”
Best Interest and signals more compliance Jed Doench, an attorney at Morgan
headaches under the SEC Marketing Rule. Lewis in New York, told me Monday in
The SEC’s plan, passed in mid-July, an email that the SEC’s proposal “can
targets “conflicts of interest” associated be viewed as an indirect expansion” of
with broker-dealers’ and advisors’ use Reg BI.
of predictive data analytics related to “While Reg BI only applies to rec-
certain investor interactions. ommendations (a longstanding and
Early concerns are about the scope of the plan — with attor- appropriately narrow concept under the
Early concerns are also being raised
securities laws) to retail investors, this
being raised about neys at Morgan Lewis suggesting it goes new proposal would apply a conflict of
the scope of the plan beyond AI and other sophisticated or interest framework to potentially any
“opaque technologies” to potentially cover
communication with a retail investor
— with attorneys “virtually any type of technology, ranging that is generated by a ‘covered technol-
at Morgan Lewis from basic spreadsheets and calculators to ogy,’ which is defined very broadly in the
suggesting it goes applications using large language models.” proposal,“ Doench explained.
Under the SEC’s plan, broker-dealers
“Importantly, the proposal is even
beyond AI and other and advisors would be required “to take stricter than Reg BI because it would
“opaque technologies” certain steps to address conflicts of inter- not allow brokers to address conflicts
est associated with their use of predictive
of interest through disclosure,” Doench
to potentially cover data analytics and similar technologies relayed. “Additionally, the proposal does
to interact with investors to prevent
not contain any exemption from its
virtually any type firms from placing their interests ahead requirements for communications that
of technology. of investors’ interests,” the agency said. comply with Reg BI.”
The SEC’s plan is out for a 60-day According to Peirce, the definition of
comment period; comments are already “covered technology” in the agency’s plan
trickling in. “is quite broad.” She questioned whether
SEC Chairman Gary Gensler said that it would encompass “Excel spreadsheets,
if adopted, “these rules would help pro- for example, and mathematical formulas
tect investors from conflicts of inter- used to price securities?”
est — and require that, regardless of the Peirce added: “The rule claims to be
technology used, firms meet their obli- technology neutral — and maybe it is
gations not to place their own interests because the definition of ‘covered tech-
ahead of investors’ interests.” nology’ is so broad — tell me how I am
During the open meeting on July 26 wrong to think that we are creating an

September 2023 Investment AdvIsor 35