SEC Predictive Analytics Proposal Targeted by Senate Republicans

Senate Republicans Tuesday introduced the Protecting Innovation in Investment Act to prevent the implementation of a proposed predictive data analytics rule from the Securities and Exchange Commission. The bill was proposed by Senators Ted Cruz, R-Texas, and Bill Hagerty, R-Tennessee.

The full name of the SEC’s proposal is “Conflicts of Interest Associated With the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers,” and it has been widely opposed by the financial industry, primarily because of the wide range of technologies covered.

The SEC’s proposal would require an adviser to “eliminate or neutralize the effect of conflicts of interest associated with the firm’s use of covered technologies in investor interactions that place the firm’s or its associated person’s interest ahead of investors’ interests.”

A covered technology refers to “a firm’s use of 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.”

Commenters on the proposal have said it would effectively prevent the use of several basic technologies. The ERISA Industry Commission noted in its letter to the SEC that the proposal would apply to ordinary retirement readiness calculators and chatbots that recordkeepers and other firms utilize with retirement plan participants. ERIC called on the SEC to fully withdraw the proposal.

The American Benefits Council also called for a withdrawal and Empower asked for an exemption for retirement education tools such as readiness calculators.

Supporters of the senators’ proposed bill echoed the concerns. The Insured Retirement Institute released an emailed statement Tuesday stating that “The [SEC] proposal’s broad definition of covered technology serves not to effectively establish guardrails for the future as intended but to paralyze and cast a shadow on the present.”

The Investment Company Institute wrote that the proposal would bring “everything from the most sophisticated technologies to simple spreadsheets into question under the new conflict of interest standard, and would be almost impossible to comply with, inhibiting firms’ use of technology to better serve investors.”

The bill will likely be referred to the Senate Committee on Banking, Housing and Urban Affairs and no hearing or vote on it is scheduled.