Better Markets filed a comment letter with the Securities and Exchange Commission to clarify that a recent Fifth Circuit decision does not prevent the SEC from adopting three proposed rules:  a rule to eliminate conflicts of interest in the use of artificial intelligence by broker-dealers and investment advisers; a rule to enhance cybersecurity practices at investment advisers, and a rule to prohibit investment advisers from outsourcing certain services or functions without first meeting minimum requirements.

Why It Matters. The increasing use of artificial intelligence in the securities industry means that appropriate guardrails must be put in place to ensure that technological advancements benefit rather than harm investors. Artificial intelligence offers tremendous promise, but it also poses opportunities for firms to put their interests ahead of the investors they are supposed to serve. The SEC’s rule proposal to require that broker-dealers and investment advisers eliminate conflicts of interest when using artificial intelligence in their interactions with investors is a necessary measure to ensure that the securities laws keep pace with technological innovations. Similarly, the increasing threats that firms face from cyberattacks means that cybersecurity is essential for investor protection. The SEC’s rule proposal to require that investment advisers have policies and procedures designed to address cybersecurity risks will enhance investor protection and contribute to financial stability by making advisers and funds more resilient to cyberattacks and data breaches. And the increasing use by investment advisers of service providers to perform certain functions also exposes investors to additional risks. The SEC’s rule proposal to enhance oversight of investment advisers’ outsourced functions is designed to mitigate these risks.

What We Said. A recent Fifth Circuit decision held that the SEC did not have the authority to adopt rules imposing certain requirements on investment advisers to private funds. Some commenters have asserted that this decision means the SEC should withdraw its proposed rules regarding artificial intelligence, cybersecurity, and outsourcing. But the decision regarding private fund advisers does not mean the Commission cannot regulate investment advisers generally, and it has no impact on the regulation of broker-dealers. And regardless of the ramifications of the Fifth Circuit’s holding on the Commission’s ability to regulate private funds, there is no question that the Commission retains the authority to adopt rules to protect retail investors from conflicts of interest in their interactions with broker-dealers and investment advisers and to minimize the risks that retail investors face when they entrust broker-dealers and investment advisers with helping them to invest their savings.

Bottom Line. Better Markets supports the SEC’s rule proposals regarding artificial intelligence, cybersecurity, and outsourcing, and those proposals should not be withdrawn.