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US SEC adopts new cyber rule, unveils brokerage AI proposal

US SEC announces proposal for brokerage AI and passes new cyber regulation

In an effort to assist the investing public cope with the rising cost and frequency of cyberattacks, Wall Street’s top regulator on Wednesday enacted new regulations forcing publicly traded corporations to disclose hacking events.

The five-member U.S. Securities and Exchange Commission also voted on a party-line basis to propose requiring broker-dealers to address conflicts of interest in the use of artificial intelligence in trading. This reform was partially motivated by the events of the 2021 “meme stock” rally, when officials discovered robo-advisers and brokers used AI and game-like features to influence user behavior.

According to the new cybersecurity regulation, businesses must notify investors of a cyber breach within four days of finding that it is serious enough to have an impact. According to the SEC, the rule would permit delays if the Justice Department determined they were required to safeguard police investigations or national security.

Companies will also need to regularly outline their efforts to locate and handle online risks. The rule is a part of a larger SEC initiative to fortify the financial system against data theft, system failure, and cyber-intrusions. It was first proposed in March 2022.

Republican commissioners voiced their disagreement, arguing that the proposed regulation was superfluous given already-existing regulations, overly costly for businesses, and may provide hackers with a roadmap to the weaknesses of their targets and the amount of ransom to demand.

SEC officials said that they had modified the proposal in response to public feedback, eliminating a requirement that businesses disclose the level of cybersecurity competence of their board members.

Broker-dealers would be required to “eliminate or neutralize” any conflicts of interest that arise if a trading platform’s predictive data analytics puts the broker’s financial interest ahead of that of the firm’s clients, according to the AI proposal unveiled on Wednesday.

Republican commissioners opposed once more, saying the idea was pointless given the disclosure rules for brokerages and may impede the adoption of emerging technologies.

“The release does seem to suggest that investors simply melt into puddles of incompetence when confronted with these technologies, so disclosure doesn’t work for them,” Commissioner Hester Peirce observed.

The proposal, according to William Birdthistle, director of investment management for the SEC, would not replace any disclosure obligations, and a special regulation was required because the technologies are highly scalable, complicated, and frequently opaque.

On Wednesday, the SEC unanimously suggested expanding a registration requirement for internet-based investment advisors, narrowing an exception that officials claimed some had used to circumvent this.

If implemented, the regulation would, among other modifications, mandate that investment advisers deliver financial advice via a functional, interactive website, barring them from improperly utilizing the two-decade-old exception.

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