October 24, 2023 - In early October, the LSTA, joining the American Investment Council, submitted a comment letter in connection with the SEC’s  proposed rule, Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers .  As we recently noted, the proposal was ostensibly designed to prevent conflicts in the use of “predictive data analytics” and similar technologies in investor interactions. The scope of the proposal is incredibly broad, it is operationally unfeasible, and its economic analysis significantly understates its costs. Moreover, the SEC again veered from decades of accepted practice by requiring advisors and broker-dealers to eliminate any potential conflicts without permitting mitigation of those conflicts through disclosure and informed consent. The LSTA previously joined  15 other trade associations imploring the SEC to withdraw the PDA proposal on the grounds that it is unnecessary, inadequately reasoned and fatally flawed, and that the SEC lacks statutory authority to adopt these rules.

In our latest comment letter, we note that the proposal is at odds with the SEC’s recently adopted Modernized Marketing Rule for Investment Advisers and urge the SEC to exclude from the scope of the proposal all advertisements and endorsements subject to that rule. The SEC neither addresses nor explains the impact the proposal would have on the marketing rule and there is no analysis or explanation of the interplay between the two. Moreover, the SEC’s policy goals relating to technology were already addressed when the SEC adopted the marketing rule just over two years ago. Both the marketing rule and the proposal, if adopted, will affect investment advisers’ use of technology when communicating with investors, but the SEC provides no guidance about, or even an explanation of, that conflict. For example, the SEC does not address whether compliance with the specific requirements of the marketing rule would be sufficient to “neutralize” a conflict of interest as required under the proposal. Paradoxically, while not explaining the conflicts between the proposal and the marketing rule, the SEC instead points to the marketing rule as an example of actions taken by the SEC to account for new technologies. More concerning, the SEC asked no questions for commenters to respond to about the significant impact that the proposal would have specifically on compliance with the marketing rule. It appears that the SEC could not have had a full appreciation of the impact on the marketing rule when it issued the proposal, an inadvertent material omission in the SEC’s analysis of its proposal.

The comment letter then reasserts and further develops our argument that Section 211(h) of the Advisers Act does not provide the SEC with authority to adopt the proposal. In the joint trades letter noted above, we expressed our strong objection to the SEC’s assertion that Section 211(h) of the Advisers Act provides it any source of authority to adopt the proposal. In this letter we point out that in asserting authority under Sections 211(h), the SEC appears to believe Congress granted it a blank check to adopt rules regarding any sales practice, conflict of interest, or compensation practice of an investment adviser. As we and the other associations have stated, this cannot possibly be the case with an authority granted in a section entitled “Other Matters.” The proposal lacks a discussion of the SEC’s understanding of the scope of its authority and its specific findings as they relate to “covered technologies” that would support the link between the proposed prohibitions and its statutory authority. Without any such explanations, the public is left without meaningful opportunity to comment. The SEC’s apparent belief that it has expansive rulemaking authority is especially troubling given that the same authority relied upon for the proposal is currently pending court review in connection with the Private Fund Advisers Rule. Accordingly, we urge the SEC to withdraw the proposal.

We will continue to closely monitor the proposal.

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