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WASHINGTON, D.C. –A proposed rule by the U.S. Securities and Exchange Commission (SEC) to address financial firms’ conflicts of interest in the use of technology is overbroad, over-reaching, rife with flaws, and should be withdrawn, according to the Insured Retirement Institute (IRI).

The proposal, “Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers,” is purportedly intended to eliminate, or neutralize the effect of, certain conflicts of interest associated with broker-dealers’ or investment advisers’ interactions with investors through these firms’ use of certain technologies.

In comments filed with the SEC, IRI said the proposed rule’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. It would significantly expand financial services firms’ obligations far beyond the effective standards of conduct that already apply to recommendations. The proposed rules would apply to the use of nearly all types of technology that could be used in connection with a wide range of activities that are already appropriately regulated, including marketing, research, and even investment education.

Similarly, the proposal rejects the bedrock principle underlying the federal securities laws that fully and fairly informed investors can make their own decisions. Disclosure and informed consent would be insufficient. Firms would instead have to eliminate or neutralize the effects of any aspect of covered technology that does or could take its interests into consideration, even if the investor’s interests are still clearly paramount.

The SEC has offered no evidence to support this drastic overhaul of decades of effective regulation, which will deprive investors of access to essential and valuable resources without improving investor protection in any meaningful way.

“It appears that the SEC is using its concerns about evolving technology to justify a complete overhaul of the rules, across a variety of activities covered by existing regulations, that govern the conduct of firms and their representatives without directly proposing to amend those rules,” wrote Jason Berkowitz, Chief Legal and Regulatory Affairs Officer and Emily Micale, Director of Federal Regulatory Affairs at IRI.

IRI outlined several reasons why the SEC should withdraw the proposal.

  • Outside the scope of the SEC’s statutory authority;
  • Lacks an adequate economic analysis to demonstrate that the benefits to be achieved by the proposed conflict rules would outweigh the associated costs;
  • Fails to consider the unique and substantial adverse impact of the proposed conflict rules in the annuity and insurance space;
  • Overreaches in applying to the use of nearly all forms of technology;
  • Unjustifiably disregards precedent by purporting to cover conduct other than recommendations;
  • Needlessly extends to a far broader universe of investors than existing standards of conduct;
  • Disregards the well-established meaning of “conflict of interest” in favor of a unique and far-reaching approach;
  • Rejects a core principle of the federal securities laws by disallowing disclosure as a method to address conflicts;
  • Unnecessary as the current regulatory framework already serves to effectively address conflicts of interest that could arise from the use of technology.

“IRI firmly believes that the proposal must be withdrawn,” Berkowitz wrote. “It is rife with countless flaws, as explained throughout this letter and as we expect will be explained in letters from numerous other commenters. These flaws cannot be repaired in order to produce a workable and effective final rule. Instead, a fresh start is needed.”

He concluded, “Following withdrawal of the proposal, we would encourage the SEC to undertake a more diligent, constructive, inclusive, engaging, and ongoing effort to better understand new technology and to determine how best to balance the value of innovation with the need for appropriate consumer protection. For our part, IRI would welcome the opportunity to participate in such an effort.”


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Contact: Dan Zielinski

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