Lucas Questions SEC Chairman Gensler

Sep 27, 2023

Washington, DC – Today, Congressman Frank Lucas (OK-03) joined his colleagues on the House Financial Services Committee for a hearing entitled, “Oversight of the Securities and Exchange Commission.”

Lucas questioned SEC Chairman Gary Gensler on the Commission’s recent proposed rules. The prosed rule, Safeguarding Advisory Client Assets, would disrupt commodities markets and indirectly regulate entities overseen by the CFTC. Another proposed rule, regarding the use of predictive data analytics, would restrict the ability of broker-dealers and investment advisers to use technology to benefit investors and hamstring innovation. 

Click here to watch Lucas’ Q&A. 

On the Safeguarding Advisory Client Assets proposed rule:

Lucas: “Chair Gensler, I’d like to focus on the proposed rule branded as Safeguarding Advisory Client Assets.

“The proposed rule would impose requirements that are inconsistent with CFTC rules – you’ve spent a good amount of time on CFTC rules in your past life – and would indirectly give the SEC – I fear – authority over CFTC-regulated markets.

“In addition to being outside the SEC’s authority, this would create significant problems, I think, across U.S. financial markets.

“Have you consulted with the CFTC on the impact of the proposed rule, and, if so, what was their feedback?” 

Gensler: “First, Representative Lucas, it’s so good to see you, and your letter with regard to securities based swaps not only gained my attention but there are many people at the SEC who said, ‘this is Representative Lucas’s letter, would you please take a close look at it.’ But on your topic in your question about safeguarding of assets, the staff has consulted with fellow regulators at the CFTC about that safeguarding rule, taken their thoughts into consideration, and we are sometime away. This was only proposed earlier in this year and it usually takes 12-24 months before we even consider adoption. But I think that there are paths forward in terms of the intersection between their Rule 1.25 and these custody rules.”

Lucas: “I just think it’s imperative that the SEC refrain from applying the proposal to CFTC-regulated markets, and I hope that you’ll be able to commit to that, even if it means perhaps at some point withdrawing the rule entirely.”

On the predictive data analytics proposed rule:

Lucas: “The Commission has also recently proposed a rule regarding the use of predictive data analytics used by broker-dealers and investment advisers.

“The proposed rule casts a broad net over what is considered a ‘covered technology.’ And I quote directly from the rule, ‘a covered technology is defined as ‘an analytical, technological, or computational function, algorithm, model, correlation matrix, or similar method or process that optimizes, predicts, guides, forecasts, or directs investment-related behaviors or outcomes.’ What a mouthful.

“The included economic analysis explains that the rule would require substantial resources to comply with, and would prevent smaller firms from entering the market or adopting new technology at all.

“So, Chair Gensler, could you clarify what technologies are covered, and is the intent of the rule to make it difficult for firms to employ certain kinds of technology?”

Gensler: “The intent of the rule is to be technology neutral, and it’s only about one really core thing: is that when investment advisors or broker dealers interact with investors, if they’re using, as you said a covered technology or predictive data analytics, that they continue to put the investor’s interests ahead of their own, and they do not – in reverse – put the investor’s interest ahead of the investing public. That is the core of this proposal.”

Lucas: “I’d simply add that given the rapid advances in machine learning and generative A.I., the United States should lead the way in the development of innovative technologies that would unlock new economic opportunities. We should be careful not to be so hostile to new technologies that we stop innovation in its tracks.”


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