State financial officers warn SEC against regulating AI use in investing

A group of 16 state financial officers this week warned the Securities and Exchange Commission against imposing what they deemed "burdensome" requirements on investors to limit conflict of interest from using AI and predictive data analytics when making investments.

With AI and similar technologies becoming increasingly popular with investing firms, the SEC has expressed concerns that use of such technologies could present a conflict of interest between the investors and the asset managers. Its proposals to mitigate the issue, however, have drawn the ire of more than a dozen members of the State Financial Officers Foundation (SFOF), who have warned that the SEC's proposals would stifle competition.

"The Proposed Rules muddy broker-dealers and investment advisers' ('firms') existing legal dues by imposing several layers of costly bureaucracy on firms who use technology to better serve their clients, and at least some of these costs will be passed on to our state and to other investors in our states," they wrote to SEC Chairman Gary Gensler. "The Proposed Rules' burdensome requirements would drive up costs for investors, harm competition, and limit investor options. The SEC fails to justify the need to impose these costs and harms, and fails to explain why the Proposed Rules are necessary."

The SEC announced its proposal in July of this year, suggesting requirements that a firm "evaluate and determine whether its use of certain technologies in investor interactions involves a conflict of interest that results in the firm's interests being placed ahead of investors' interests."

"Firms would be required to eliminate, or neutralize the effect of, any such conflicts, but firms would be permitted to employ tools that they believe would address these risks and that are specific to the particular technology they use, consistent with the proposal," the SEC announcement read. "The proposed rules would also require a firm to have written policies and procedures reasonably designed to achieve compliance with the proposed rules and to make and keep books and records related to these requirements."

"Today’s predictive data analytics models provide an increasing ability to make predictions about each of us as individuals. This raises possibilities that conflicts may arise to the extent that advisers or brokers are optimizing to place their interests ahead of their investors’ interests," Gensler said at the time.

The SFOF, however, sees the move as part of a broader effort by the Biden administration to impose a political agenda through the realm of corporate finance.

"We continue to see the SEC pushing political agendas through proposed rules, rather than common sense policies that help the American people. This new proposed rule puts unnecessary burdens on investors, while increasing the costs of doing business," SFOF CEO Derek Kreifels said in a statement. "These financial officers are objecting to the rule and protecting investors in their states who cannot afford to have these high costs passed onto them. This is just another example of the Biden Administration focusing on politics and a left-leaning agenda when he should be focusing on bringing down inflation and stabilizing the economy."

Signatories of the letter SFOF letter to Gensler include Alaska Commissioner of Revenue Adam Crum, Arizona Treasurer Kimberly Yee, Indiana Treasurer Dan Elliott, Iowa Treasurer Roby Smith, Kansas Treasurer Steven Johnson, Louisiana Treasurer John Schroder, Nebraska Auditor Mike Foley, Nevada Controller Andy Matthews, North Carolina Treasurer Dale Folwell, Oklahoma Auditor and Inspector Cindy Byrd, Oklahoma Treasurer Todd Russ, Pennsylvania Treasurer Stacy Garrity, South Carolina Treasurer Curtis Loftis, South Dakota Treasurer Josh Haeder, Utah Treasurer Marlo Oaks, and Wyoming Treasurer Curt Meier.

Ben Whedon is an editor and reporter for Just the News. Follow him on X, formerly Twitter.