SEC Withdraws 14 Proposed Rules, Signaling Lighter Regulatory Touch

The U.S. Securities and Exchange Commission recently announced the withdrawal of 14 proposed rulemakings issued between 2020 and 2023, indicating a significant shift away from a period of extensive regulatory proposals that would govern how registered investment advisers operate. This move suggests the agency – now led by Chairman Paul Atkins – does not intend to finalize these rules.

An SEC spokesperson affirmed the change in direction, telling third-party reporting: “As the chairman has said, we are getting back to our roots of promoting, rather than stifling, innovation. The markets innovate, and the SEC should not be in the business of telling them to stand still.”

The withdrawn proposals, many of which had drawn criticism from registered investment advisers and industry groups, cover a wide range of areas impacting financial institutions. Among the notable proposals now off the table are:

• Predictive data analytics: This rule targeted broker-dealer and investment adviser use of AI and behavioral nudging, including requirements for RIAs to evaluate their use of such technologies and eliminate potential conflicts of interest.
• Safeguarding advisory client assets: This would have significantly overhauled the custody rule under the Investment Advisers Act of 1940, including requirements for alternative assets like cryptocurrencies to be held by qualified custodians.
• ESG disclosures: The proposal sought to mandate how advisers and funds disclose the integration of environmental, social, and governance factors into investment decisions.
• Outsourcing by investment advisers: This rule would have imposed new due diligence and disclosure requirements on third-party service providers, including periodic monitoring and risk analysis.
• Cybersecurity risk management: A proposed rule would have mandated comprehensive cybersecurity programs and required public disclosure of cybersecurity breaches within 48 hours for various entities including RIAs, broker-dealers, and swap dealers.
• Regulation best execution and order competition rule: These proposals aimed to create new best execution requirements for broker-dealers and require brokers to expose retail orders to open auctions before internal execution, respectively.

The SEC’s website confirms that the Commission “does not intend to issue final rules with respect to these proposals. If the Commission decides to pursue future regulatory action in any of these areas, it will issue a new proposed rule.”

The U.S. House Committee on Financial Services Chairman French Hill (AR-02) praised the SEC’s decision, and the potentially less burdensome environment for financial institutions.

“I commend the SEC’s decision to withdraw several misguided [Gary] Gensler-era proposed rulemakings. For too long, consumers and financial institutions have faced unnecessary burdens imposed by overreaching federal regulators. This announcement is a meaningful step toward restoring balance, protecting investors, and encouraging innovation,” Hill said.

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