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SEC Chair Gensler warns of potential risks of AI in financial industry

On Behalf of | Nov 9, 2023 | Securities and Compliance

The Chair of the Securities and Exchange Commission addressed the opportunities and risks presented by the growth of artificial intelligence during an exclusive interview with MarketWatch recently.

Gensler discussed the potential ramifications of AI technology for the financial industry, which has become a matter of concern to the SEC.

He said AI could transform the industry as financial institutions harness its power to “predict things that were unimaginable even 10 years ago”, but also cautioned about its consequences.

“A growing issue is that [AI] could lead to a risk in the whole system,” Gensler said. “As many financial actors rely on one or just two or three models in the middle … you create a monoculture, you create herding.”  He said a concentration in the market for AI technology could contribute to additional market turbulence during times of stress.

As another indication of its concern over the AI issue, the SEC proposed new rules in August regarding the use of predictive data analytics and artificial intelligence to interact with investors.

Specifically, the rules would require broker-dealers and investment advisers to take certain steps to address conflicts of interest associated with their use of these technologies in order to prevent firms from placing their interests ahead of investors’ interests.

Under the proposal, firms would have to review their use of “covered technologies”, which were defined as “analytical, technological, or computational functions, algorithms, models, correlation matrices, or similar methods or processes that optimize for, predict, guide, forecast, or direct investment-related behaviors or outcomes of an investor.” Firms would have to determine whether its use of these technologies in investor interactions involves any conflict of interest and eliminate or neutralize the effect of any such conflicts.

In the MarketWatch interview, Gensler noted the difficulties of regulating AI technology given the fact that the SEC has oversight over securities markets but banks or commodity markets fall under the purview of other agencies.

“This is more of a cross-entity issue,” Gensler said. “That’s the challenge for these new technologies.”

In testimony before Congress earlier this year, Gensler also highlighted the ways AI has transformed finance.  “AI already is being used for call centers, account openings, compliance programs, trading algorithms, and sentiment analysis, among others,” he said. “It’s also fueled a rapid change in the field of robo-advisers and brokerage apps. When the predictive data analytics and algorithms behind these apps are optimizing for investor interests, this can bring benefits in market access, efficiency, and returns.”

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