September 12, 2023 - The LSTA this week joined two letters submitted to the SEC by groups of trade associations to request that the SEC withdraw and/or repropose two important recent rule proposals: Conflicts of Interest Associated with the Use of Predictive Analytics by Broker-Dealers and Investment Advisers (the “PDA Proposal”) and Safeguarding Advisory Client Assets (the “Safeguarding Proposal”). Requests to withdraw proposed regulations are very unusual; to have two such letters submitted on consecutive days by large groups of trade associations is, perhaps, unprecedented and reflects the unusually aggressive pace and breadth of the current SEC’s rulemaking efforts.
We’ve previously explained our concerns about the PDA Proposal and several law firm memos have analyzed its significant problems. Similarly, we’ve discussed the problems with the Safeguarding Proposal and the related comment letter we submitted. The specific issues identified in each of the letters reflect some of the concerns we’ve previously identified. But there are several important themes that are reflected in each letter.
Although the proposed rules are very different, the joint trades in each case assert that the proposals are excessively broad, vague and unworkable. Each letter also notes that the problems are compounded by the impacts of many of the other rules that the SEC has recently proposed, especially those with interconnectedness and dependencies between them. Moreover, in both proposals, the SEC has made no attempt to assess the cumulative effects of all these proposals, neither in the individual proposals nor through a separate holistic analysis.
In the case of the PDA Proposal, the letter also argues that the Proposal is “unnecessary, inadequately reasoned and fatally flawed” and that the SEC lacks the statutory authority to adopt these rules. That concern is heightened because the statutory authority relied upon in the Proposal is currently pending court review (in the lawsuit the LSTA and five other trade associations recently filed against the SEC concerning the Private Fund Advisers Rule). The letter addressing the Safeguarding Proposal suggests that the proposal conflicts with its goal of ensuring high levels of investor protection and will, instead, “result in a myriad of negative impacts on investors, including their access to various services, assets, and markets with well-established rules and procedures.”
One important difference between the letters relates to the need for regulation in the first place. While the letter relating to the Safeguarding Proposal agrees with the SEC’s assertion that appropriate safeguarding of clients’ assets is critical to investor (but concludes that the Safeguarding Proposal fails to meet the SEC’s stated goals), the letter relating to the PDA questions the very necessity of the rule and the SEC’s statutory authority to impose such a rule. We will continue to monitor the PDA Proposal and the Safeguarding Proposal and report on developments as warranted. Please reach out to Elliot Ganz if you have any questions.