The SEC’s Proposed Rules On Investment Adviser Obligations Could Create Regulatory Risks For Fintech Startups


Fintech startups in the financial services industry are facing potential regulatory risks due to recent attempts by the Securities and Exchange Commission (SEC) to broaden the obligations of investment advisers and broker-dealers. The proposed rules aim to redefine fiduciary duties and restrict the use of cutting-edge technologies, such as artificial intelligence (AI), by these entities.

Key Takeaway

The SEC’s proposed rules on investment adviser obligations, aimed at broadening fiduciary duties, could pose significant regulatory risks for fintech startups in the financial services industry. Startups relying on advanced technologies, like AI, may face compliance challenges and increased costs.

A Historical Perspective on Fiduciary Duties

Investment advisers have traditionally been regarded as fiduciaries to their clients, even though the Investment Advisers Act of 1940 does not explicitly impose fiduciary duties. A landmark Supreme Court case in 1963, SEC v. Capital Gains, emphasized that advisers are fiduciaries. However, the Court’s ruling only required the disclosure of conflicts of interest, without addressing the possibility of eliminating these conflicts.

Expanding the Interpretation of Fiduciary Duties

Fast forward to 2019, the SEC issued an interpretive release that significantly expands the scope of an investment adviser’s fiduciary duties. The new standard includes a duty of care, which involves providing advice in the client’s best interest, striving for the best execution of transactions, and offering ongoing advice and monitoring. It also encompasses a duty of loyalty, which requires the elimination of conflicts of interest or full and fair disclosure of such conflicts.

Potential Challenges for Fintech Startups

While these proposed rules are intended to protect investors and ensure greater transparency, they may inadvertently impede the progress of fintech startups. Startups that rely heavily on technology, including AI and machine learning, to manage investor assets and assess investment suitability could face regulatory hurdles and compliance costs.

Implementing robust measures to comply with the expanded fiduciary duties could strain the resources and limited budgets of these startups. They will need to navigate this regulatory landscape meticulously to avoid missteps that may jeopardize their viability in the industry.

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