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By Megan Nash

Picture having a crystal ball for your finances – that’s the power of predictive analytics.

In a world where technology is racing ahead, a recent panel discussion on “Predictive Analytics in Capital Markets” unpacked new regulations proposed by the U.S. Securities and Exchange Commission (SEC) affecting broker-dealers, investment advisers and the possible misuse of predictive data analytics (PDA).

Hosted by VCU Business on December 5, the panel brought together five industry experts, each giving their take on how PDA is reshaping the financial landscape. Despite the intricate nature of the topic, the discussion provided valuable insights, moderator Dr. Naomi Boyd, stated, “I feel really strongly that a lot of conversation around regulation as well as where we are headed in terms of the integration of technologies is about education. We’re here to become more informed, as well as to provide conduits for greater conversation around these issues.”

Here are the top takeaways from the panelists:

For Starters, Rulemaking Has Changed

The rulemaking game has a new playbook and it’s making waves in the world of regulations.

As Brett Redfearn, Founder & CEO of Panorama Financial Markets Advisory (PFMA), pointed out, “The rulemaking process is incredibly important because we want to get it right.” Redfearn shed light on the process changes, expressing concern about the lack of industry deliberation in current rulemaking initiatives.

He highlighted the historical importance of thorough engagement, stating, “Back in the days of Regulation NMS, which was a very significant role change in the United States, we talked about it [related issues] for [at least] three years before there were any [rule] proposals even put out there.”

Redfearn underlined the critical steps involved, from identifying a clear problem to understanding it through extensive study and engagement with industry participants. However, the recent trend seems to bypass these vital stages, with proposed rules emerging prematurely. The absence of roundtables and public forums raise questions about the readiness for such rulemaking, especially in areas like artificial intelligence (AI), where understanding the benefits and dangers is an ongoing process.

Technology is a Positive Thing, But Please Regulate Responsibly 

In our tech-driven world, where gadgets are a part of our daily routine, it has also changed how we invest. Over the last 15 years, technological innovation has reshaped financial markets and empowered investors.

“Because of the democratization of capital markets, we’ve seen increased participation, making investing more accessible,” said Boyd.

However, concerns were raised about proposed regulations potentially hindering these advancements. Boyd added, “As we start to restrict some of these possibilities, we’re almost taking a huge step back.”

This prompted a look into the need for responsible regulation, recognizing the risks associated with biased predictive analytics and information overload. The sentiment was reinforced by Peter Munoz, Head of Transaction Monitoring for the Anti-Money Laundering Division at Capital One, saying, “Technology is the solution to the problem of too much information,” highlighting the importance of a balanced regulatory approach.

Reflecting a broader industry point of view, Scott Eckel, Managing Director for Legislative & Regulatory Affairs at Charles Schwab, urged the withdrawal of the [SEC’s] recent proposal, citing the risk of significant and unintended consequences for retail investors.

The Tightrope of Investor Protection v. Technological Progress

Walking a fine line between safeguarding investors and keeping tech on the cutting edge, panelists discussed the importance of finding the balance to regulatory reforms.

Brett Redfearn addressed the significance of the conflicts of interest in financial recommendations saying, today we already have in place Regulation Best Interest, or Reg BI,

which says to a broker dealer, “If you are making an [investment] recommendation to a client, you have to identify conflicts that you potentially have, and if you have a conflict, you have to [either] eliminate or mitigate that conflict.” Additionally, investment advisers have a fiduciary duty requiring the disclosure of conflicts and prioritizing the interests of investors over personal or institutional interests.

Another concern raised was that current rules might be preventing the positive impact of technology. “I think it starts with greater collaboration, greater disclosure and information exchange,” said Jeremy Sheridan, Managing Director at FTI Consulting.

In the same vein, Barbara Comstock, Executive Director for the American Consumer & Investor Institute, zeroed in on the nuanced interaction between regulation and innovation addressing the need for innovation-friendly regulations. “Yes, we want to have regulation. Yes, we want to protect investors, but we want it in a way that still allows for innovation to move forward, she said, later adding, “This SEC Chairman [Gary Gensler] has failed to point to any evidence the technologies he seeks to restrict are being abused or harm investors yet he has advanced rules that would stifle innovation and limit the tools available to investors.”

All Roads [Could] Lead to Regulatory Sandboxes

Select panelists argued that innovation should thrive within defined boundaries. In this regard, the subject of regulatory sandboxes unfolded where panelists weighed in on structured spaced for accountability.

“Sandboxes are a phenomenal opportunity to put [new technology] into play in a safe environment to identify the problems, identify what works and the solutions to move forward,” said Sheridan.

For further details on the discussed proposal, additional information can be found on the SEC website.

Meet the Panelists

Barbara Comstock
Executive Director, American Consumer & Investor Institute

Elected in 2014, Barbara made history as the first woman to hold Virginia’s Tenth Congressional District seat, earning accolades as one of the “Top Ten Most Effective Lawmakers.” A prominent figure in technology, she chaired the House Science, Space and Technology Subcommittee on Research and Technology and has a history of leadership and advocacy for women’s programs.

Scott Eckel
Managing Director, Legislative & Regulatory Affairs, Charles Schwab

With over two decades of policy experience in Washington, D.C., since 2012 Scott has spearheaded Charles Schwab’s engagement with policymakers on Capitol Hill and at a variety of regulatory agencies. Formerly Senior Policy Advisor to Rep. Scott Garnett, he played an active role in the Dodd-Frank Act deliberations and has a diverse background including work for U.S. Senator John Sununu and leading the Washington office of the New England Council, a regional business organization based in Boston.

Peter Munoz
Head of Transaction Monitoring, Anti-Money Laundering Division, Capital One

As head of Transaction Monitoring at Capital One’s Anti-Money Laundering Division, Peter Munoz oversees teams constructing predictive models for detecting suspicious activity. Previously serving as Deputy Chief of Analysis at the U.S. Treasury Department’s financial crime agency and as a Senior Analyst for sanctions and illicit finance at the Central Intelligence Agency, Peter led international projects including terrorist financing and cyber-enabled fraud.

Brett Redfearn
Founder & CEO, Panorama Financial Markets Advisory (PFMA)

As the founder of PFMA, Brett guides innovators through strategic, regulatory and operational challenges in digital assets and traditional securities. With a distinguished career including 14 years at J.P. Morgan where he was most recently Global Head of Market Structure for the Corporate and Investment Bank and Director of the SEC’s Division of Trading and Markets, he brings expertise to advising companies in the fintech, stock exchange and asset management sectors.

Jeremy Sheridan
Managing Director, FTI Consulting

A seasoned professional in digital currencies, financial crime investigations, blockchain and smart contracts, Jeremy is the Managing Director for FTI Consulting’s Blockchain and Digital Assets service. Formerly the Assistant Director in the U.S. Secret Service Office of Investigations, Jeremy led their global investigative mission and later assumed the role of Vice President of Regulatory Affairs at crypto custody firm, Prime Trust, before joining FTI Consulting.

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