SEC Considering Modified Version of Much Maligned Predictive Data Analytics Proposal

Gary Gensler, chair of the Securities and Exchange Commission, announced that he has directed SEC staff to consider a modified version of the predictive data analytics proposal.

The predictive data analytics proposal, brought forward in July 2023, would require advisers to eliminate conflicts of interest related to their use of predictive technologies, defined as “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.”

Gensler has indicated twice that a re-proposal might be coming. The first was at the SEC’s 2023 conference on emerging trends in asset management on May 16. He explained that: “We’ve received a lot of feedback from the public on this proposal. As we have done from time to time with other rules, I’ve asked staff to consider whether it would be appropriate to seek further comment, possibly, on a modified proposal.”

The proposal has been harshly criticized by the advisory and financial industries, and many comments in the public comment file called for a full withdrawal of the rule. In particular, the definition of “covered technology,” or those technologies subject to the proposal, has been criticized as preposterously broad to the point that it would include Excel spreadsheets.

On May 23, at the Investment Company Institute 2024 Leadership Summit, Gensler said of a possible re-proposal that “we’re considering it with the staff,” but added that he “can’t prejudge” whether a re-proposal will actually take place because he is one of five voting commissioners of the SEC.

Gensler explained that it was not the volume of negative comment letters nor who they were written by but “the substance” of the letters that convinced him that modifications and a new comment period might be necessary.

Modifications Possible, Abandonment Unlikely

In both settings however, Gensler defended the core purpose of the proposal, which is to eliminate the programming of conflicts into predictive technologies that prioritize the adviser’s interest over their clients. At the ICI conference, Gensler asked, “What if the algorithm is optimizing on the adviser’s revenue or profits?” He added that when using predictive technology, “you still have to put the investor’s interest ahead of yours.”

At the SEC emerging trends conference, Gensler similarly said that “if the optimization function in the AI system is taking the interest of the platform into consideration as well as the interest of the customer, this can lead to conflicts of interest. When brokers or advisers act on those conflicts and optimize to place their interests ahead of their investors’ interests, investors may suffer financially.”

At a September congressional hearing, William Birdthistle, the former director for the SEC’s Division of Investment Management, and a key drafter of the proposal, acknowledged that the breadth of the definition was a concern for him too and invited commenters to offer alternatives.

However, at a conference hosted by the Investment Adviser Association in March, he again acknowledged that the definition of covered technology would likely have to be modified but also said, like the chair, that the broader project would not be abandoned: “Do I think this project is going to go away? No, I don’t.”