The Securities and Exchange Commission (SEC) is in the process of contemplating a ban on brokers and investment advisers using predictive technologies. This move is aimed at eliminating potential conflicts of interest born from their use, causing widespread uncertainty among investment professionals.
Predictive technologies have grown exponentially due to advancements in fields like artificial intelligence, machine learning, and emerging tech overall. Those in favor of the SEC’s proposition argue it would eliminate the risk of unethical practices by investment advisers focused more on profitability than client benefit. However, the rule’s ambiguous language may discourage U.S. brokers from harnessing fast-evolving technology in their operations, putting them at a competitive disadvantage against international contenders.
Concerns have escalated due to the proposed rule’s broad definition of “conflicts,” which could even include something as simple as considering a broker’s or investment adviser’s interests. With this interpretation, the rule could unintentionally impede activities using emerging technologies. It’s noteworthy that the proposed rule lacks consideration for the weighing of potential costs and benefits of practices despite potential conflicts.
In traditional business operations, conflicts are an inevitable part of transactions between parties. Current regulation for advisers hinges on identifying, disclosing, and potentially mitigating these conflicts. Banning all practices where conflicts arise seems like a departure from the norm, causing confusion.
Historically, deals involving conflicts have been sanctioned so long as the conflicts and related risks are clearly disclosed—enabling investors to make informed decisions. Investment decisions are often made on the understanding that potential benefits outweigh possible conflicts.
The proposed rule appears to shift towards a merit-based regulatory regime from the traditional disclosure-based one. This new regime would prohibit practices even if conflicts and risks were clearly explained and understood by parties, which stands in contrast to typical engagement where the perceived benefits outweigh associated negatives.
Further adding to the murkiness is the rule’s failure to differentiate between retail investors and institutional investors. The latter typically hold the skills necessary to analyze disclosed conflicts and decide whether they void potentially worthwhile investments. Therefore, shifting to a merit-based regulatory regime could unintentionally harm these investors.
The regulation of rapidly evolving emerging tech is fraught with the potential for unintended consequences. A broad regulatory approach could stifle technological development—a tacit risk in this proposed rule that needs careful consideration.
The article was composed by James A. Deeken, partner at Akin Gump and adjunct lecturer at Southern Methodist University School of Law. He expresses concern that the SEC’s deliberations may inadvertently curtail technological evolution, and advises caution to avoid such unforeseen repercussions.