ThinkAdvisor: The SEC's New AI Plan Expands Reg BI — and More

This ThinkAdvisor article about the SEC’s proposed rulemaking that would seek to eliminate conflicts of interest in financial advisors’ use of certain covered technologies references the corresponding Eversheds Sutherland Legal Alert, as follows:

Attorneys at Eversheds Sutherland weighed in with their thoughts after the SEC passed the plan by a 3-2 vote. They stated in an alert that while the SEC staff “was clear that they did not view the rule proposal as ‘expanding’ Reg BI … the rule proposal certainly imposes an additional layer of regulation beyond Reg BI and the advisory fiduciary duty.”

For instance, the attorneys wrote, “Reg BI begins with an account or investment ‘recommendation,’ and non-recommendation communications are not subject to Reg BI’s heightened standard of care. Likewise, an adviser’s fiduciary duty applies with respect to an advisory relationship with its clients.”

The rule proposal “goes beyond both of these concepts, and imposes additional duties on any ‘investor interactions,’ where such interactions may not be covered by Reg BI or an adviser’s fiduciary duties.”

While the SEC may not have explicitly proposed to revisit or amend Reg BI or the fiduciary duty, it proposed rules that would expand the scope of the type of “interactions” and activities that are now subject to SEC requirements, the attorneys wrote.

The SEC “did use this rulemaking as an opportunity to create new standards or requirements that would, if ultimately adopted, apply to AI, machine learning and predictive data analytics,” the attorneys said.

The attorney agreed that the definition of a covered technology “is quite broad, and includes an ‘analytical, technological, or computational function, algorithm, model, correlation matrix, or similar method or process that optimizes for, predicts, guides, forecasts, or directs investment-related behaviors or outcomes.’”

Given this broad definition, and statements by the SEC in the release proposing the rule, “it seems clear the SEC is seriously considering imposing new standards for broker-dealer and investment adviser use of novel or algorithmic-driven analytical tools, such as AI, machine learning, and generative language models,” the Eversheds attorneys said.