SEC Chair Gary Gensler defended the agency's artificial intelligence and climate disclosure proposals at the Securities Industry and Financial Markets Association's annual meeting Nov. 7.
In July, the SEC introduced a proposal that would require investment advisers and broker-dealers to "eliminate or neutralize" conflicts of interest in investor interactions that use certain technologies, including AI.
"It's a basic concept that the client comes first," Gensler said. If investment advisers use an algorithm that optimizes their "profits, revenue (or) interest, therein lies a conflict," he added, and the SEC wants to ensure advisers eliminate or neutralize that conflict.
However, many industry players, including SIFMA's President and CEO Kenneth E. Bentsen Jr., have called on the SEC to withdraw the proposal in comment letters.
"We're concerned, and I think a lot of industry commentators are concerned, that the breadth of the rule (is) perhaps beyond what the intent of the commission is," Bentsen said to Gensler.
At a Nov. 2 hearing in the House Financial Services Subcommittee on Capital Markets, Bentsen testified that the rule would "force firms to more or less police their clients, which is really the role of the SEC."
But Gensler told Bentsen that the proposal "builds upon the concepts you know, that a broker-dealer puts their clients' interest … (first), and investment advisers have fiduciary duties."
Bentsen then asked if the proposal is consistent with what's required under the SEC's Regulation Best Interest, to which Gensler replied, "Largely speaking, yes. We're not trying to change Reg BI or change the fiduciary guidance."
The rule package commonly known as Reg BI took effect in 2020 and was created to address broker-dealers' and investment advisers' obligations when they provide recommendations or investment advice to retail investors. Reg BI's best-interest standard aims to compel brokers to put clients' financial interests ahead of their own and requires them to mitigate financial conflicts.
Gensler also defended the commission's controversial climate disclosure proposal, which the SEC issued in March 2022. While the commission has yet to issue the final rule, the proposal would require public companies to disclose an array of climate-related information in their registration statements and periodic reports, including direct and indirect greenhouse gas emissions.
As he has said repeatedly, Gensler asserted that many public companies are disclosing this information already, and the SEC aims to "bring some consistency and comparability" to those disclosures.
