WASHINGTON — A forthcoming rule from the Securities and Exchange Commission on the use of AI in finance is in the crosshairs of two Republican senators, who introduced a bill Tuesday to kill the regulation before it can be finalized.
The draft rule unveiled last July would require financial firms to identify and eliminate conflicts of interest that emerge from their use of AI tools, and to ensure they are prioritizing their clients’ interests over their own bottom lines.
SEC Chairman Gary Gensler has warned of the danger of letting AI tools make incorrect assumptions about investors, and exercise a bias toward a firm’s own products.
More than 20 Republican lawmakers in the House and Senate sent Gensler a letter last fall, calling on the SEC to withdraw the rule. They argued that compliance would be so costly that it would essentially bar firms from adopting new any technology, not just AI.
The Protecting Innovation in Investment Act was introduced by Sens. Ted Cruz (R-Texas) and Bill Hagerty (R-Tenn.). It would bar the SEC from moving forward in finalizing the rule.
“American consumers will ultimately bear the cost of yet another SEC attempt to overregulate financial markets,” said Hagerty in a statement to CNBC. “The agency should demonstrate the ability to securely manage its own technology before seeking to micromanage and hinder innovative technologies at private firms.”
While there is growing bipartisan consensus on the need for regulations and limits around AI, lawmakers have yet to agree on the standards.
“New technologies over the last decade have allowed more Americans to access the stock market than ever before,” said Cruz. “By waging a war on technology, the SEC would hurt the very investors that it claims to be protecting.”
Cruz and Hagerty’s early pushback on some of the first proposed federal regulations on AI illustrates how tricky it could be for the federal government to actually enact the new rules it plans to propose.
The Senate bill currently lacks Democratic support, meaning it’s unlikely to get much traction as long as Democrats control the Senate.
But it sets the stage for a battle next year if Republicans maintain control of the House and win control of the Senate in November. Under the Congressional Review Act, Republicans only need a simple majority of votes in both chambers (rather than the 60 votes typically needed to move Senate legislation) in order to repeal any rule that was finalized in the past 60 legislative days.
If the final SEC rule is issued after the beginning of November, and not before it, then the rule could fall in the window of CRA, come January 2025.
While Democrats have not signed onto the bill, that doesn’t mean they have no issues with the regulation.
In a comment to the SEC, Rep. Ritchie Torres (D- NY) pointed out the regulation wouldn’t just apply to AI, but to almost all technology used by investment advisors and broker-dealers. He also argued the precedent has been for the SEC to require firms to disclose potential areas of interest, not eliminate them completely.