The SEC is dropping a slew of proposals that would have heightened advisors’ responsibilities for cybersecurity, AI use, outsourcing and more.
The Securities and Exchange Commission posted a notice Thursday saying it was withdrawing more than a dozen reforms proposed between March 2022 and November 2023. That was a particularly active period of rulemaking for the industry watchdog. At the time, then Chair Gary Gensler was pushing to overhaul large parts of the regulatory regime designed to protect investors.
Among the rules now on the cutting-room floor are a pair of proposals that would have subjected both registered investment advisors and broker-dealers to heightened cybersecurity requirements. The rule for brokers would have required firms that suffer cyberattacks to inform federal regulators immediately and then follow up within 48 hours with a more detailed report. The rule for advisors would have allotted the same 48 hours for reporting hacks, along with imposing other obligations.
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The SEC did approve a rule in 2023 requiring businesses and other entities to disclose cyberattacks. But that change applied to all publicly traded companies, not just firms in a specific industry.
Neutralizing conflicts in AI, machine learning
Among the rules withdrawn by the SEC this week is one that sought to make advisors responsible for eliminating or neutralizing any conflicts of interest that may be inherent in any sort of artificial intelligence or machine learning system or sophisticated algorithm they may be using to provide investment advice or other client services. The proposal was greeted almost immediately with pushback from many corners of the industry. Critics contended the rule’s wording was so far-reaching and ambiguous that it could conceivably apply to spreadsheets and other applications long in use.
Outsourcing rule drew concerns about small firms
Also jettisoned this week was a proposal that would have made advisory firms responsible for ensuring that no breaches of fiduciary duty or violations of other industry rules occur at third-party firms they enlist for help with investing software, investment indexes, regulatory compliance and other functions. The so-called outsourcing rule drew criticism from firms that worried they didn’t have the resources to police outside companies.
Custody concerns related to discretionary trading
Still another of the dropped rules would have required advisors to place cryptocurrency, private
securities, real estate derivatives and other alternative assets with banks, brokerages or other third-party custodians for safe storage, much as they must do now with stocks and mutual fund investments. The so-called custody rule also drew criticism over a provision applying to advisors who engage in “discretionary” trading — or buying and selling securities on behalf of clients without needing permission for each individual transaction. Critics decried the rule’s requirement that advisors with discretionary trading authority draw up new contracts with every third-party custodian they use to hold clients’ assets.
Jonathan Chiel, the general counsel for Fidelity Investments, wrote in a letter to the SEC that the change would “require drafting, negotiating, re-executing and organizing the custodian relationships for the vast majority of the 15,000 SEC-registered investment advisers — essentially all registered investment advisers that provide any kind of portfolio management.”
Sense of ‘too much, too fast’
Along with criticisms specific to the individual proposals, industry groups had also complained about the sheer number of new rules put forward under Gensler. The Investment Adviser Association, which represents more than 600 advisory firms and related entities, once calculated that the SEC’s ambitious regulatory agenda could have subjected firms to as many as 13 new rules over the course of two years.
Following the inauguration of President Donald Trump in January, the SEC has taken a decidedly lighter touch to industry regulation. His appointee to lead the agency, current Chair Paul Atkins, has declared that it is a “new day” at the SEC as the commission itself has moved toward loosening the reins on everything from cryptocurrencies to private investments.
The withdrawal of the proposed rules are part of the same push.
“As the Chairman has said, we are getting back to our roots of promoting, rather than stifling, innovation,” a spokesperson for the SEC said in an email “The markets innovate, and the SEC should not be in the business of telling them to stand still.”
