Witnesses included Valerie A. Szczepanik, director of the SEC's Strategic Hub for Innovation and Financial Technology, commonly known as FinHub, and Michael S. Gibson, director of the Federal Reserve's division of supervision and regulation.
Szczepanik said in her testimony that it's important for FinHub to help the SEC "strike the right balance between fostering beneficial and responsible innovation in our capital markets, on the one hand, and preventing potentially harmful and illicit practices against investors on the other."
A few lawmakers asked Szczepanik about FinHub's role in the SEC's predictive data analytics proposal, commonly referred to as the AI proposal, which has received significant pushback since its July release.
The proposal would require investment advisers and broker dealers to "eliminate or neutralize" conflicts of interest that arise from the use of certain technologies, like AI, in investor interactions. Many have raised concerns that the scope of the proposal is too broad and in effect would stifle technological innovation.
Szczepanik said that FinHub generally serves as a "subject matter expert" to the rest of the commission and does not have any rule-making authority.
"For any particular rule-making, the staff who are working on the rule may come to the FinHub staff and ask us: How do particular things work? What is under the hood of this technology?" she said, adding that FinHub analyzes technologies like artificial intelligence.
When asked how the SEC uses AI internally, Szczepanik told Rep. Sean Casten, D-Ill., that agency staff uses things like "natural language processing and machine learning to analyze data sets and market data … to, for example, flag aberrations or trends to inform what the commission staff is doing across the board."
The Office of Management and Budget has pending guidance to advise federal agencies on their use of internal AI, "so (the SEC) will be monitoring the progress of that guidance and incorporating that going forward," she added.
Separately, Subcommittee Vice Chair Warren Davidson, R-Ohio, asked Gibson about the progress of the Fed's work on a central bank digital currency, or CBDC.
"The Federal Reserve is doing research on CBDC technologies, trying to understand the technologies themselves and how they might be useful," Gibson responded, adding that it's solely "research and experimentation at this point."
When asked for more information on when to expect the issuance of a CBDC, Gibson said the Fed is "a long way off from thinking about implementation of anything related to a CBDC."