In a Legal Alert issued before the SEC's open meeting, we posed five questions that our Investment Services team would be looking out for as part of this meeting. We now have answers to some of these questions.
Investment advisers and broker-dealers would be subject to far-reaching requirements that would capture many interactions with investors and advisory clients under rulemaking proposed by the Securities and Exchange Commission (SEC). On Wednesday, July 26, the SEC voted by a 3-2 margin to propose new and amended rules under the Securities Exchange Act of 1934 (Exchange Act) and the Investment Advisers Act of 1940 (Advisers Act) that capture adviser and broker-dealer use of “covered technologies” in investor interactions. The rule proposal paints a broad stroke. Covered technologies include algorithms, models, and a lot more. To the extent a covered technology is used in connection with a firm’s engagement with an investor or advisory client, a firm would be required to eliminate or neutralize all conflicts of interest in connection with use of the technology to the extent the conflict places the firm’s or its associated person’s interest ahead of investor and advisory client interests. The proposed rulemaking goes much further than what many had anticipated.
The proposal awaits publication in the Federal Register. Upon publication there will be a 60-day comment period. One would expect significant industry comment regarding the scope of covered technology and the reach of the rule broadly to investor interactions. We are continuing to analyze the proposal and will be back with additional thoughts.
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1 See Proposing Release at pages 234 and 241.
2 See Proposing Release at page 6.
3 See Proposing Release at pages 234 and 241.
4 See Proposing Release at page 11.
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