Gensler SEC’s PDA rule would keep investors in the dark

Hailing one of his new mandates on entrepreneurs and investors, SEC Chairman Gary Gensler proclaimed, “In today’s fast-moving financial markets, it’s important that market participants have access to fair, accurate and timely information.”

Yet ironically, another pending mandate that Gensler is championing would take away accurate and timely information from ordinary retail investors. In fact, it is specifically designed to do so.

The SEC’s new proposed rule on “predictive data analytics” (PDA) would put heavy restrictions on broker-dealers and investment advisers giving investors information derived from a broad range of technologies.

The rule would require these firms to “neutralize or eliminate” broadly defined “conflicts of interest,” rather than simply disclosing conflicts to their investor clients. The rule makes no clear path to eliminate conflicts, so many firms would simply stop providing investors this information.

As my Competitive Enterprise Institute colleague James Broughel and I pointed out in our comments last week to the SEC (which James also covered in a new Forbes column and this post), the SEC’s PDA rule  lacks “sufficient empirical evidence to support the assertion that current market dynamics, driven by the use of PDAs and related technologies, are causing widespread harm to investors.” We add that by restricting the information investors would receive, the rule “may violate the First Amendment’s prohibition on government suppressing truthful speech.”

On the potential First Amendment violation, we cite a Wall Street Journal op-ed by former Attorney General Bill Barr and former US Rep. Barbara Comstock (R-VA) which makes the case that the rule will prevent ordinary investors from receiving truthful information from their broker-dealers and investment advisers, leaving that information in the hands of financial elites.

Barr and Comstock state that the rule “also creates glaring constitutional issues by restricting what information firms can communicate to the public without adequate justification.” They explain: “As courts have recognized, there is no ‘securities law exception’ to the First Amendment. Under the U.S. Constitution, unless a communication is deceptive, the mere fact that it imparts to a customer information consistent with a speaker’s own interests can’t possibly justify these sweeping restraints.”

Even without the First Amendment issue, there is no data the SEC produces to justify these sweeping restraints on providing investors information. In the rule, the SEC doesn’t really identify a problem with so-called investor “irrationality,” but rather displays its own irrational fears of ordinary investors getting together to buy and push certain stocks such as GameStop.

In the comments, we explain why the SEC is the one that is acting irrationally, as well as tyrannically, in attempting to halt the spread of this information to ordinary investors. We make the point that the SEC “fails to consider that many do not view the events surrounding GameStop and other so-called ‘meme stocks’ as a problem but rather as a watershed moment that demonstrated the power of ordinary investors when collaborating with beneficial communications technologies, as well as a new method of providing valuable information to the market about firms’ intrinsic worth.”

The new movie Dumb Moneycelebrates smaller investors besting the so-called “smart money” of professional money managers who arrogantly took big bets against these stocks without considering market pushback.

As I wrote in this blog in 2021 on the “meme stock” surge:

Just as short sellers benefit a market by reducing information asymmetry, … so do the “new longs” add information about the hidden value of certain companies. All of the companies targeted by the Redditors have engendered good will through their business history and brand names. The surge in stock price could communicate to financiers that the companies could have much value with a retooled product. The share price of GameStop in particular probably won’t stay near the high it reached, but the prices and valuation of these companies may remain higher for a long time [and] may stay higher than they were before the price swing, as the market may have rediscovered some of their intrinsic worth.

Almost three years after the “meme stock” surge, at least two companies that were on the brink of bankruptcy before the “new longs” took on the shorts – GameStop and AMC – are still around and even expanding into new lines of business that complement their core operations.

For the good they are doing, the savvy ordinary investors Gensler’s SEC wants to stop with its PDA rule deserve thanks. With the current rule, the SEC is instead heaping contempt upon them.

Disclosure: The author has traded and currently owns shares in AMC.