October 10, 2023
VIA ELECTRONIC SUBMISSION
Vanessa A. Countryman
U.S. Securities and Exchange Commission
100 F Street NE
Washington, D.C. 20549-1090
Re: Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers
The Securities Industry and Financial Markets Association and the Securities Industry and Financial Markets Association’s Asset Management Group (collectively “SIFMA”)1 appreciate the opportunity to submit this letter to the Securities and Exchange Commission (the “Commission”) on proposed rules that would require the elimination or neutralization of certain conflicts of interests associated with the use of “covered technologies” (including predictive data analytics (“PDAs”) and PDA-like technologies) by Broker-Dealers (“BDs”) and Registered Investment Advisers (“RIAs” and, together with BDs, “Covered Firms”) pursuant to the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940 (the “Proposed Rules”), as described in the release titled Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers, Release No. IA-6353; File No. S7-12-23 (July 26, 2023) (the “Proposing Release”).2
The Proposed Rules would broadly impose a new conflicts elimination or “neutralization” requirement on BD and RIA interactions with investors, covering both (i) advisory relationships and the provision of recommendations and (ii) arms-length communications where the BD or RIA has not undertaken special duties to the investor or invited reliance on the provider’s expertise. As such they would fundamentally rewrite the existing regulatory regime under which RIAs and BDs provide services to investors.3 The Proposing Release fails, however, to justify such a radical regulatory expansion. Among other shortcomings, the Proposing Release fails to provide any rational basis for concluding that the existing, robust regulatory regime is insufficient to address the specific concerns raised in the Proposing Release. The Proposing Release also does not establish a rational relationship between the limited and speculative theories of harm it describes and the costs that would be imposed by the Proposed Rules. To the extent the Commission believes that there is a need to augment the existing regulatory regime, it can and should work constructively with industry to address those concerns in an appropriately targeted and evidence-based manner. The Proposed Rules do not reflect such a reasoned approach and for that reason should not be adopted.
The Proposed Rules are fundamentally flawed, and adoption by the Commission would be arbitrary and capricious, for the following reasons:
- There is already a robust, reasonable, and effective regulatory regime that governs investor interactions associated with BDs’ and RIAs’ uses of technology, both in connection with providing recommendations and advice and in the context of marketing communications. The Proposing Release does not provide meaningful evidence of any shortcomings in that regime and gives no reason to believe that there is a significant risk of harm to investors arising from BDs’ and RIAs’ potential future uses of technology in either context.
- The Proposed Rules would impose uniform conflicts elimination or neutralization requirements across both of these contexts without regard to the existing regulatory framework or the underlying relationship established between the parties. Indeed, the proposed definitions and requirements are so expansive in scope that they would encompass (and burden) countless uses of technology – including many routine and long-standing practices – that have no rational relationship to the limited concerns expressed in the Proposing Release.
- The requirements of the Proposed Rules are also fundamentally flawed in design and unworkable in practice as they would impose inventory and balancing-of-interests 3 As used herein, the term “investors” should be understood to mirror the definition provided in the Proposing Release, which encompasses all individual and institutional clients and retail customers, as well as prospective clients and prospective retail customers. For the avoidance of doubt, however, and for the reasons described in Sections II and IV below, the members of SIFMA believe that this definition is overbroad and unprincipled. requirements that would be impractical, if not impossible, to administer much of the time. Beyond imposing substantial and unjustified burdens, they would often simply prevent a vast array of beneficial investor interactions and advisory practices. Because the requirements of the Proposed Rules would severely inhibit BDs’ and RIAs’ uses of technology and their ability to communicate with retail customers and clients, the Proposed Rules 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, the decision to apply the Proposed Rules to institutional clients and discretionary investment decisions is unexplained in the Proposing Release, and it is inconsistent with the logic underlying the Proposed Rules and illogical in light of the underlying business relationships and activities.
- Adoption of the Proposed Rules would be unlawful, arbitrary, and capricious, including because adoption would exceed the authority of the Commission, and because the resulting 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.
For these reasons, as described further below, SIFMA urges the Commission not to move forward with the proposed framework. We would be happy to discuss more suitable ways to address the Commission’s concerns about uses of PDA-like technologies (including risks related to conflicts of interest), but the Proposed Rules are too imprecise and logically flawed to be a constructive starting point for developing appropriate regulation.
1 SIFMA is the leading trade association for BDs, investment banks, and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s nearly one million employees, we advocate on legislation, regulation, and business policy affecting retail and institutional investors, equity and fixed income markets, and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (the “GFMA”).
SIFMA’s Asset Management Group (“SIFMA AMG”) brings the asset management community together to provide views on U.S. and global policy and to create industry best practices. SIFMA AMG’s members represent U.S. and global asset management firms whose combined assets under management exceed $45 trillion. The clients of SIFMA AMG member firms include, among others, tens of millions of individual investors, registered investment companies, endowments, public and private pension funds, UCITS, and private funds such as hedge funds and private equity funds. For more information, visit http://www.sifma.org/amg.
2 Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers, Release No. IA-6353; File No. S7-12-23 (July 26, 2023), 88 Fed. Reg. 53960 (Aug. 9, 2023), available at https://www.govinfo.gov/content/pkg/FR-2023-08-09/pdf/2023-16377.pdf.
3 As used herein, the term “investors” should be understood to mirror the definition provided in the Proposing Release, which encompasses all individual and institutional clients and retail customers, as well as prospective clients and prospective retail customers. For the avoidance of doubt, however, and for the reasons described in Sections II and IV below, the members of SIFMA believe that this definition is overbroad and unprincipled.