The Securities and Exchange Commission’s proposed rules centered on reps using predictive data analytics is, “largely speaking,” trying to make compliance consistent with Reg BI, according to SEC Chair Gary Gensler.
While the commission may not be out to change Reg BI or advisors’ fiduciary guidance, the new rule is needed in a world where every consumer can be micro-targeted with products, pricing and communications, Gensler told Securities Industry and Financial Markets Association (SIFMA) President and CEO Ken Bentsen during a discussion at its annual public policy conference.
“In this predictive data analytics era, where you can take a lot of data and you can bolt onto it an algorithm that’s optimizing … on the investment advisors’ profits, revenues, interests, therein lies a conflict,” Gensler said. “I don’t see how you can see it otherwise.”
Gensler’s appearance comes several weeks after SIFMA urged the commission to drop the proposed rule, writing that the predictive data analytics rule “fails to provide any rational basis” for showing that current regulations can’t meet the commission’s concerns. SIFMA also warned the rule would introduce differences to Reg BI and advisors’ fiduciary mandates that would be “unsound in concept and unworkable in practice.”
The SEC released the proposal in July and would require firms to evaluate whether using certain technologies creates conflicts that place firm interests ahead of investors. The proposal was deemed by an SEC staffer to be broader than the current best interest requirements for brokers, and a final version is expected for sometime in 2024.
But Gensler told Bentsen the commission was addressing scenarios where a firm or app optimizes for their revenues and profits in such a way that “tilts” what clients are told.
“It’s going to tilt the recommendations and tilt the communications. It’s going to put some people in margin accounts or options that you wouldn’t otherwise do,” he said. “That’s the basic thing we’re trying to address.”
Following Gensler’s appearance were several speakers decrying the SEC’s rulemaking agenda, with Sen. Bill Hagerty (R-Tenn.) calling the pace of the rulemaking “alarming,” and Baird CEO Steve Booth arguing the industry was in a period of “unprecedented regulatory intensity.”
Gensler didn’t address longstanding critiques about the quantity of rulemaking, but he did speak about the commission’s climate disclosure proposal, which would mandate that publicly-traded companies reveal climate-related information about their business, which Gensler maintains is in response to heightened investor interest.
The Chair said the SEC received 16,000 comments on the proposal, that the commission had a role in bringing consistency to disclosure requirements and that companies risked facing a “fragmented space” with differing state and international rules to follow if the SEC didn’t step in.
“We are absolutely not a climate regulator,” he said. “We’re a disclosure-based securities regulator."
