The Securities and Exchange Commission is withdrawing several rules proposed initially during the Biden administration, including a rule intended to rein in firms’ conflicts of interest when using artificial intelligence (AI).
In the past two days, the commission has halted 14 rules that are still pending final passage that were mostly proposed during previous SEC Chair Gary Gensler’s tenure.
The list contains several proposed rules that would impact registered investment advisors (RIAs), including the AI-related “predictive data analytics” rule, one on investment advisors’ ESG conflicts and a proposal on cybersecurity risk management.
The “predictive data analytics” rule would require firms to “eliminate or neutralize” conflicts if using those data tools (such as AI) could place firms’ interests ahead of clients.
The commission originally proposed the AI rule in 2023. Though it received harsh pushback from the industry, Gensler defended the rule, arguing it was needed in a world where customers can be microtargeted for products and services.
In 2024, Investment Adviser Association General Counsel Gail Bernstein told WealthManagement.com that the rule would be “a brand new framework for handling conflicts” that could weaken advisors’ ability to fulfill their fiduciary duty. Additionally, an attorney with Robinhood previously warned that the rule could cause investors to leave the market altogether.
The ESG advisor proposal focused on “greenwashing” in the space and required advisors to provide additional information regarding ESG investment practices to create “a consistent, comparable and decision-useful regulatory framework for ESG advisory services,” according to the rule’s description on the White House’s Office of Management and Budget site.
Both rules had been tentatively scheduled for their final votes for some time (the ESG rule was initially proposed in 2022, with the final rule vote first scheduled for spring 2023), but they and other rules were pushed back for a myriad of reasons; according to OMB information from last October, the commission had been considering re-proposing the AI rule.
But that became a moot point in November, when Donald Trump won the 2024 Presidential Election. With Trump’s inauguration and Paul Atkins’s nomination for SEC Chair, it was widely expected that holdovers from Gensler’s time would be on the chopping block.
According to Max Schatzow, a partner with RIA Lawyers and a frequent attorney for registered firms, the withdrawals would come as a relief for smaller and mid-sized firms who likely would have struggled with the “operational complexity and compliance burdens” of the rules.
“These rules, while well-intentioned, risked imposing lots of new requirements on investment advisors without providing meaningful investor protection benefits in return,” he said.
Schatzow said he was also eyeing potential implementation delays or walkbacks on Regulation S-P and the anti-money laundering rule for advisors, though this would be harder as these rules have already been finalized and are awaiting their effective dates.
The SEC did not respond to questions about whether any of the rules would be re-proposed.