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Industry Resists SEC’s Oversight on AI in Finance

AI Regulation | Nov 10, 2023

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The U.S. Securities and Exchange Commission (SEC) recently proposed a plan to regulate the use of artificial intelligence (AI) in investment advice, sparking a significant pushback from various industry stakeholders.


In July, the SEC proposed rules that would require banks and fund managers to neutralize or eliminate any conflict of interest involving almost any form of technology when advising clients. SEC Chair Gary Gensler expressed concerns to the Financial Times about the potential for AI to trigger a financial crisis within a decade without swift regulatory intervention. The proposals, known as "Reg PDA," focus on predictive data analytics and aim to mitigate the risk that the scalability of AI-related advice could harm investors more rapidly than previous technologies.

Comment period closed October 10, generating a slew of responses from a wide range of stakeholders.  Now, brokers, hedge funds, and investment advisers are challenging the SEC's plan, which they deem unnecessary and impractical to implement.

See:  Proposed SEC Rules on Predictive Data Analytics for Dealer-Brokers and Investment Advisors

In response to industry concerns, Gensler emphasized the importance of protecting investors from the financial equivalent of targeted online communications. He argues that the proposal is about ensuring that revenue and profit motives do not skew investment recommendations.

Despite the industry's opposition, consumer groups have shown support for Reg PDA. They argue that current investor protections are insufficient and that advisers' technology could still steer investors, even if it stops short of explicit recommendations.

Industry Pushback

  • Major financial planning groups and firms such as Morningstar and Betterment have raised concerns that the SEC's proposal could undermine the fiduciary duty they owe to their clients. They argue that the broad scope of the proposed rules could extend to basic technological tools, going beyond the intended AI and predictive analytics.
  • Critics, such as Jonathan Santelli of Raymond James Financial, argue that the SEC's overly broad definition of 'covered technology' could extend to mundane business operations, potentially stifling innovation and complicating routine processes.  The proposal's "broad definitions will halt alternative asset managers' business operations and stifle the use and development of financial technology," said Bryan Corbett, president and CEO of the Managed Funds Association.

See:  Can AI Truly Replace Human Financial Advisors?


The SEC's initiative to regulate AI in investment advice has sparked a heated debate in the financial sector. As always, balancing investor protection with technological advancement remains a key challenge and industry and regulators must find middle ground to address both innovation and investor safety.

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