US SEC Set to Adopt New Cyber Rule, Unveils Brokerage AI Proposal

Wall Street’s top regulator on Wednesday was poised to adopt new rules requiring publicly traded companies to disclose hacking incidents, a measure officials said was being taken to help the investing public contend with the mounting cost and frequency of cyber attacks.

The five-member US Securities and Exchange Commission was also set to issue a proposal governing potential conflicts of interest in broker-dealers’ use of artificial intelligence, a reform partly influenced by the events of the 2021 “meme stock” rally when officials found robo-advisers and brokers used AI and game-like features to drive trading.

If adopted, the cybersecurity rule would require companies to disclose a cyber breach within four days after determining it is serious enough to be material to investors. The rule would allow delays if the Justice Department deems them necessary to protect national security or police investigations, according to the SEC.

Companies will also have to describe periodically what efforts they are making to identify and manage threats in cyberspace. The rule, first proposed in March of 2022, forms part of a broader SEC effort to harden the financial system against data theft, systems failure and cyber-intrusions.

Ahead of the vote, SEC officials said that in response to public comments they had trimmed certain parts of the proposal, removing a requirement for companies to disclose board members’ expertise in cybersecurity and narrowing the definition of what information must be disclosed.

The AI proposal, if issued by the commission, would require broker-dealers to “eliminate or neutralize” any conflict of interest that occurs if a trading platform’s predictive data analytics puts the broker’s financial interest ahead of that of the firm’s clients.

SEC Chair Gary Gensler had previewed the AI rule in recent weeks, noting the use of AI also posed a danger to financial stability. According to a regulatory agenda, the SEC is also planning to issue a similar proposal governing the use of AI by investment advisers.

In a third vote also scheduled for Wednesday, the SEC is to decide whether to propose changing rules that exempt some online investment advisers from registering under the Investment Advisers Act of 1940.

© Thomson Reuters 2023