SIFMA and SIFMA AMG Comment on the SEC’s Proposed Rules for BDs and RIAs

Among its many uses in the financial world, technology can improve operational efficiencies, reduce risk and provide valuable information and services to clients. In this joint post with Debevoise, we explore how new rules proposed by the U.S. Securities and Exchange Commission, purportedly focused on predictive data analytics, are fundamentally flawed, would inhibit the use and adoption of technology, and should not be adopted as proposed.

October 10, 2023 marked the end of the comment period for the SEC’s proposed rules regarding conflicts of interest and the use by broker-dealers and registered investment advisers of PDAs and other covered technologies in connection with investor interactions. The Proposed Rules garnered significant interest, with nearly 100 written submissions (available for review here), mostly from institutional and industry commenters strongly opposed to the proposal.

Among those expressing opposition were SIFMA and its Asset Management Group (SIFMA AMG) in a joint letter that argued the Proposed Rules are fundamentally flawed, and that their adoption by the Commission would be arbitrary and capricious, for the following reasons:

• The Commission has failed to demonstrate a need for the Proposed Rules in light of existing effective regulation. There are already robust regulations that govern investor interactions for BDs and RIAs, both in connection with providing recommendations and advice and also in the context of marketing and other communications that do not involve recommendations or advice. The proposing release does not point out any shortcomings in the existing regulatory regime and gives no evidence of any significant risk of harm from BDs’ and RIAs’ potential future uses of PDA technologies.
• The Proposed Rules are vague and overbroad, encompassing a wide range of commercial activities and uses of technology that have no nexus to the articulated concerns. The Proposed Rules’ conflicts elimination-or-neutralization obligations would be imposed through definitions and requirements that are so expansive in scope as to encompass (and burden) countless uses of technology, including many routine and long-standing practices. Moreover, the vast majority of covered uses would have no rational relationship to the relatively limited concerns expressed by the Commission.
• The requirements of the Proposed Rules are flawed in concept and in design and would impose unreasonable costs on firms and investors. The Proposed Rules would impose inventory and balancing-of-interests requirements that would be impractical, if not impossible, to administer much of the time. As a result, they would simply prevent a vast array of beneficial investor interactions and advisory practices. This would undermine market efficiency, inhibit competition, and harm investors by limiting the ability of BDs and RIAs to provide valuable education, information, and services, potentially jeopardizing the preeminence of the U.S. securities markets.
• For RIAs, applying the requirements of the Proposed Rules to institutional clients and discretionary trading decisions is unsupported and is likely to cause more harm than good. The decision to include both institutional clients and discretionary investment decisions within the scope of the RIA Proposed Rules presents significant and unique issues. The differential treatment is unexplained in the proposing release; it is inconsistent with the logic underlying the Proposed Rules; and it is illogical in light of the underlying business relationships and activities.
• Adoption of the Proposed Rules would be arbitrary, capricious, and contrary to law. There is significant cause for concern that adoption of the Proposed Rules would exceed the authority of the Commission, and that it would be arbitrary and capricious, because the Proposed Rules: (i) would be too vague to provide effective notice to BDs and RIAs of their obligations; (ii) would impose extraordinary, unconsidered costs without any countervailing benefits; and (iii) would lack a reasonable fit between the burdens imposed on commercial speech and any legitimate government interest.

SIFMA, like other industry commenters, offered to engage with the Commission to find more suitable ways to address any concerns the Commission may have. But, the comment letter concludes that the Proposed Rules are too imprecise and logically flawed to be a constructive starting point for developing appropriate regulation:

“The Proposed Rules would impose unreasonable and unworkable requirements on brokers and advisors and would limit their ability to use technology to provide valuable information and services to their clients,” said SIFMA President and CEO Kenneth E. Bentsen, Jr. in the letter. “These impractical limitations would harm market efficiency, competition, and investors.”

As noted by several commenters, the Commission’s rulemaking efforts have proceeded at a breakneck pace, with many important proposals recently adopted or slated for consideration in the coming quarters. It is yet to be seen how the Commission will react to the volume of opposition to these Proposed Rules, and whether they will try to add to the already busy agenda any further action on these issues.

Debevoise & Plimpton assisted SIFMA and SIFMA AMG in preparing the comment letter to the Securities and Exchange Commission that is the subject of this blog post.

Melissa MacGregor is Deputy General Counsel and Corporate Secretary for SIFMA. Representing Debevoise & Plimpton, Marc Ponchione is a Partner in the firm’s Investment Management Group; Jeff Robins is a Partner and a member of the firm’s Banking Group; and Kristin Snyder is a litigation partner and member of the firm’s White Collar & Regulatory Defense Group. Also representing Debevoise & Plimpton, Matt Kelly is a litigation counsel and member of the Data Strategy & Security Group,  Sheena Paul is a counsel in the Investment Management Group’s U.S. regulatory practice, and Jarrett Lewis and Melissa Muse are associates in the Data Strategy & Security Group.

Related Resources

• Comment Letter

  Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker- Dealers and Investment Advisers

• Press Release

  SIFMA, SIFMA AMG Express Strong Concerns with SEC Proposed Rules on Predictive Data Analytics