Seward & Kissel Submits Comment Letter on the SEC’s Proposed Rule on Conflicts of Interest Associated with Investment Advisers’ Use of Predictive Data Analytics

November 28, 2023

Seward and Kissel submitted a comment letter to the SEC in response to its request for comments on proposed new Rule 211(h)(2)-4 (the “Proposed Rule”) under the Investment Advisers Act of 1940 (“Advisers Act”) concerning conflicts of interest associated with the use of predictive data analytics by investment advisers.

The Proposed Rule would, among other things, require an adviser to eliminate or neutralize the effects of conflicts of interest associated with an adviser’s use of covered technologies in investor interactions that place the adviser’s or its associated person’s interest ahead of investors’ interests. The Proposed Rule would also require an adviser using covered technology in any investor interaction to have written policies and procedures reasonably designed to prevent violations of the Proposed Rule. Additional information concerning the proposed amendments is set forth in our August 2, 2023 blog post.

The comment letter reflects our concerns with the Proposed Rule in that we believe:

  • the Proposed Rule exceeds the scope of the SEC’s rulemaking authority under Section 211(h) of the Advisers Act, and that the SEC has not met certain statutory obligations for rulemaking pursuant to Section 211(h);
  • the scope of the definition of “covered technology” is too broad and the definition of “investor interaction” is not sufficiently clear;
  • the Proposed Rule would represent a significant departure from the existing regulatory framework (disclosure and consent), and that the SEC has not produced sufficient evidence to justify that departure;
  • the Proposed Rule would generally have the effect of altering the regulation of certain activities – namely engaging in principal and agency cross transactions, charging performance fees and using soft dollar arrangements – even though these activities are specifically permitted under current statutory provisions and rules; and
  • the proposing release does not accurately characterize the costs of the Proposed Rule, and that the benefits of the Proposed Rule are not clear.

Our comment letter can be accessed here.

 

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