SEC Reshapes Broker Optimization Function Use Rulebook

SEC Reshapes Broker Optimization Function Use Rulebook

SEC Approves Changes to Optimization Function Usage

In line with reshaping the financial landscape, an internal committee of The United States Securities and Exchange Commission (SEC) has overwhelmingly voted to alter the regulations concerning the use of “optimization functions” by brokers. This milestone decision took place during a committee voting session held on July 26th.

The internal meeting's live stream, accessible via the SEC's official site, provided spectators with insights into Chairman Gary Gensler's unconventional and thought-provoking advocacy for the proposed changes, invoking topics from his preference for romantic comedies to his aversion to the color green.

Scope of the Proposed Changes

As explained in an informational sheet released on the same day by the SEC, “covered technology” encompasses a firm's “analytical, technological, or computational functions, algorithms, models, correlation matrices, or similar methods or processes.” Additionally, the sheet indicates that any investor communications or interaction, including those involving investor account discretion, investor information provision, or investor solicitation, that leverages these technologies could lead to a conflict of interest.

Insights from the Discussion

Despite the suggested changes, Commissioner Mark Uyeda was quick to note, during the discussion, the existence of prior laws addressing potential interest conflicts between brokers and their client investors. Consequently, Uyeda withheld support for the proposed amendments.

SEC Reshapes Broker Optimization Function Use Rulebook

Responding to Uyeda, Gensler acknowledged the pre-existing regulations, arguing that the evolution of technology necessitates their revision.

In an effort to drive home his position, Gensler shared a personal anecdote, relating his dislike for the color green and his preferred movie genre, romantic comedies. He equated these discretionary likes and dislikes, discoverable via predictive analytics, to a broker's utilization of data to attract and secure potential investors.

Result of the Voting

The proposed changes managed to garner approval with a 3-2 vote along party lines, earning the disapproval of Republican Commissioners, Hester Peirce and Uyeda.

The updated rules will specifically regulate transactions of cryptocurrency and digital assets through a broker-dealer registered with the SEC.

As stated by the SEC, no “crypto asset entity is registered with the SEC as a national securities exchange,” such as the New York Stock Exchange or the Nasdaq Stock Market, and no such exchanges currently cater to crypto asset securities.

Next Steps for the Proposal

Following their approval, the changes will be announced in the Federal Register. Upon publication, the public will have two months to submit their comments before the committee indulges in the final voting round.