Proposed SEC rule on AI conflicts of interest may be abolished by new Senate bill.

• Senators Ted Cruz (R-Texas) and Bill Hagerty (R-Tenn.) have proposed a new bill that would prevent the SEC from implementing a rule on how financial advisors can utilize AI.
• The SEC claims that the rule is intended to eliminate potential conflicts of interest that may arise from requiring firms to ensure that their AI does not favor their own products.
• The anticipated clash between the White House and Congress over AI regulations is hinted at by the pushback, foreshadowing future confrontations.

Two Republican senators have introduced a bill to prevent the Securities and Exchange Commission from finalizing a rule on the use of AI in finance.

Last July, a draft rule was revealed that mandates financial institutions to detect and resolve conflicts of interest that arise from their application of AI technology, and to prioritize their clients' interests above their own profit margins.

Gary Gensler, SEC Chairman, has cautioned against the use of AI tools that may lead to incorrect judgments about investors and favor a company's own products.

Over 20 Republican lawmakers in the House and Senate wrote to Gensler in the fall, urging the SEC to withdraw the rule. They contended that the cost of compliance would be so prohibitive that it would effectively prevent firms from implementing any new technology, not just AI.

The Investment Act, which was proposed by Sens. Ted Cruz and Bill Hagerty, would prevent the SEC from implementing the rule.

The SEC's attempt to overregulate financial markets will ultimately result in American consumers bearing the cost, according to Hagerty, who stated this in a CNBC interview. Hagerty believes that the agency should first prove its competence in managing its own technology before attempting to restrict innovative technologies at private firms.

Despite increasing agreement among lawmakers on the need for AI regulations and limits, there is still no consensus on the specific standards.

"The SEC's war on technology would harm the investors it aims to safeguard, as more Americans have gained access to the stock market through new technologies in the past decade," Cruz stated.

The bill was not commented on by the SEC in response to a request from Cruz and Hagerty.

The early opposition of Cruz and Hagerty to some initial federal AI regulations demonstrates the potential challenges the government may face in implementing new rules.

As long as Democrats control the Senate, the Senate bill is unlikely to gain much traction due to the lack of Democratic support.

If Republicans maintain control of the House and win control of the Senate in November, they could repeal the final SEC rule through the Congressional Review Act, as long as the rule is issued after the beginning of November and not before it.

Although Democrats have not endorsed the legislation, they still have concerns about the regulation.

Rep. Ritchie Torres, D- N.Y., commented in a SEC comment that the regulation would not only apply to AI but also to most technology used by investment advisors and broker-dealers. He further argued that the precedent has been for the SEC to require firms to disclose potential areas of interest, not eliminate them entirely.