IPA Marks Potential Move on SEC’s Predictive Analytics Proposal and Safeguarding Rule Proposal

Recently, U.S. Securities and Exchange (SEC) Chair Gary Gensler shared that he has asked SEC staff to revisit two proposals that IPA has commented on: the Predictive Data Analytics (PDA Proposal) and the Safeguarding Advisory Client Assets (Safeguarding Rule Proposal). IPA urged the SEC to withdraw the PDA Proposal and collaborate with industry to develop a more targeted and effective regulation to address legitimate concerns about the use of covered technologies. Additionally, as part of a joint trades coalition, IPA recommended that the SEC not adopt the Safeguarding Rule Proposal in its current form and advocated for future proposed rulemaking to be based on an updated economic analysis that considers a wide range of negative consequences across the U.S. markets.

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Regarding both rule proposals, Chair Gensler remarked, “As I have done with other rules, I’ve asked staff to consider whether it would be appropriate to seek further comment, possibly, on a modified proposal.” This update on both proposals marks a potential shift in the SEC’s action and thinking over the last several years.

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“Our comments resonated with the SEC, and Chair Gensler’s remarks on a potential reconsideration of these proposals suggest that our concerns were heard and validated,” said Anya Coverman, IPA President & CEO. “We look forward to continuing to offer comments and perspective to the SEC and thank Chair Gensler for his willingness to listen to the industry’s input.”

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In the IPA’s October 10, 2023, comment letter to the SEC on the PDA Proposal, IPA expressed concern about the proposal’s scope. For example, IPA pointed out that its definition of “covered technology” is very broad and would apply to proprietary and third-party technologies and could range in complexity from artificial intelligence to basic spreadsheets. Ultimately, the rule would effectively prevent the use of both commonly utilized and new innovative technologies used in communicating with investors.

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IPA expressed concern that the proposal would define “conflict of interest” in an unprecedented way to include any use of a covered technology “that takes into consideration” an interest of the firm or an associated person. Additionally, IPA raised concerns about the proposal’s unprecedented definition of “conflict of interest,” which would encompass any use of a covered technology “that takes into consideration” an interest of the firm or associated person.

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On September 12, 2023, IPA and 25 other trade associations, collectively penned a letter to SEC Chair Gary Gensler urging the SEC not to adopt the Safeguarding Advisory Client Assets proposal – Safeguarding Rule Proposal in its current form. The letter emphasized how the proposal often overlaps with or contradicts safeguards already in place by the Commodity Futures Trading Commission, federal banking agencies, state insurance regulators, and even certain established SEC regulations.

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If adopted, the Safeguarding Rule Proposal would represent another radical change in the regulation of custodial practices under the Adviser’s Act and, like the existing Custody Rule, would likely represent several significant burdensome compliance challenges for investment advisers.