SEC’s Birdthistle Defends AI Proposal at House Hearing

The director of investment management said the definition of covered technology is not as broad as many fear, but that the SEC is taking comments on the proposal’s scope seriously.

Members of both parties criticized the scope of the Securities and Exchange Commission’s proposal on artificial intelligence technology and conflicts of interest in the financial services sector at a Congressional hearing Tuesday.

The proposal would require registered investment advisers to eliminate conflicts of interest in their use of predictive AI technology. Advisers are typically only required to mitigate and disclose conflicts, rather than eliminate them entirely.

The hearing was held by the Capital Markets Subcommittee of the House Committee on Financial Services, with testimony from William Birdthistle, director of the SEC’s division of investment management. Most of the criticism levelled at Birdthistle by policymakers was focused on the scope of the proposal, which opponents in the investment industry have previously said has a “lack of discernible boundaries” concerning which technologies are applicable.

Representative Ann Wagner, R-Missouri, the chair of the subcommittee, said the proposal is a “one-size-fits-all” approach and will “lead to a decline in retail investor participation” in securities markets.

Representative Wiley Nickel, D-North Carolina, also expressed concern about the breadth of the proposal. He said “the proposal is very broad” and will limit the market of financial advisers for retail investors. Nickel also suggested that concerns about artificial intelligence should already be covered by SEC Regulation Best Interest, and a new proposal should not be necessary.

In many instances, Birdthistle said the scope of the proposal is something being considered closely during the public comment period, which closes on October 10, and that the Representatives’ concerns were well taken.

Birdthistle explained that the “scope of the rule is restricted to machine learning, AI, predictive data analytics […] that puts [the adviser’s] interest ahead of investors,” and that this “cabins in” the scope of the proposal.

The technologies covered by the proposal, as described in the SEC’s proposal, would include any “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.”

Though Birdthistle indicated the rule is not as sweeping as many of its critics fear, or at least is not intended to be, he repeatedly insisted that reviewing the scope of the proposal and comments that remark upon it are key priorities for the SEC as it prepares to finalize the rule.

At a separate hearing last week held by the Senate Committee on Banking, Housing and Urban Affairs, Senator Mike Rounds, R-South Dakota, described the proposal as a “restrictive regulatory regime that will govern any analytics tool and is inconsistent with decades of legal and commission precedent regarding the handling of conflicts of interest.”

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