Strategic Plan: SEC enforcement to rely on AI, not whistleblowers

SEC plan to monitor, enforce rules on financial markets depends on big advances in AI, vast growth in disclosure, management of risk and operational data

The SEC today released a final version of the long-range strategic plan that is virtually unchanged from the draft version that received numerous suggestions during the public comment period in August.

The final version of the SEC’s Strategic Plan for FY 2022-2026 lists as its primary objectives the need to protect investors, maintain a robust, relevant regulatory framework and support a skilled, diverse workforce to “serve America’s investors and capital-raising entrepreneurs alike,” according to the SEC’s Nov. 23 announcement of the plan’s publication.

An online text comparison shows only minor differences between the two versions. In the draft version of the SEC lists “activities on protecting working families” as a critical mission goal; in the final version the goal was changed to “protecting the investing public.”

The SEC – which proposed so many new rules and regulatory changes during 2022 that a recent Inspector General report warned that the SEC staff is barely keeping up with a workload that includes the need to respond to direct queries and public comments – left a sentence out of the final version that expressed the SEC’s hope that the public comment process would allow it to “gain the benefit of additional outside perspective.”

The final version of the plan also promised the SEC would work harder to protect investors from cybersecurity threats or private-fund conflicts of interest – which some commenters took as a hint the agency would increase its effort to enforce Regulation Best Interest (Reg BI) in private-fund markets especially.

It did not make the Reg BI enforcement suggestion any more explicit in the final version, however, or commit more fully to protecting older investors in particular, as a comment letter from the AARP suggested.

The final version was also published without any specific promise to increase the commission’s reliance on financial practitioners from outside the agency for cost/benefit analyses of new regulations, new disclosure processes and other issues related to the financial operations of registered companies – as a note from Financial Executives International suggested.

The final plan included no indication the SEC was prepared to follow the advice of the U.S. Chamber of Commerce, which suggested that commissioners reverse course on a host of rule changes made since the end of the Trump administration that gave shareholders a more powerful role in proxy votes and expanded mandatory disclosure of data about the risk of climate change, cybersecurity and other physical and economic threats to the bottom line.

The strategic plan left out of the final plan a suggestion made by the Council of Institutional Investors that the commission require that shareholder-disclosure reports be changed in format and content to make them easier and more efficient for investors to use. That particular request was left out due to its similarity to a long-pending rule the commission enacted during an open meeting Nov. 2. that changed shareholder-reporting rules in a very similar way.

Massive data, AI analytics to boost SEC enforcement

The bulk of the SEC’s Strategic Plan revolves around massive upgrades in the agency’s capacity for data gathering processing and analysis. Without those improvements, according to the plan, the SEC would have difficulty keeping up with rapid growth in the volume of data required by new rules on disclosure or deliver on the SEC’s own goal of building a market-data-analysis platform that would allow it to remotely monitor and enforce regulatory policy on financial markets no matter how quickly they change.

The intent is to use data as a strategic asset to improve enforcement and investor protection in every market the SEC regulates.

“The SEC must continue to employ timely, cutting-edge data analysis that helps accomplish its regulatory mission; provide well-structured, material data to investors; and manage data as a strategic asset,” according to the plan, which also calls for a modernization and expansion of the content, pace and design of disclosures from regulated entities to make that level of enforcement possible.

“All financial activities should be subject to consistent and efficient regulation and enforcement, regardless of the entity, the technology, or the business model,” the plan read.