Artificial intelligence opens up tremendous opportunities for humanity, but also presents challenges for regulators to tackle, like conflicts of interests in the investing space, according to SEC Chair Gary Gensler.
"If the optimization function in an AI system is taking the interest of the platform into consideration ahead of the customer, that's a problem," Gensler said in a Feb. 13 speech at the Yale Law School. In finance, when brokers or advisers act on those conflicts and place their interests ahead of their investors' interests, investors may suffer financial harm, he added.
Gensler said that logic is why the SEC in July issued its artificial intelligence conflict-of-interest proposal.
The proposal, called "Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers," would require investment advisers and broker dealers to "eliminate or neutralize" conflicts of interest in all types of investor interactions and uses of technology.
Several industry groups have called on the SEC to withdraw the proposal over fears it is too broad and would raise costs for advisers and investors. And on Feb. 6, Sen. Ted Cruz, R-Texas, and Sen. Bill Hagerty, R-Tenn., introduced a bill to prevent the SEC from finalizing, implementing or enforcing its AI rule or any rule that is substantially similar.
Gensler on Feb. 13 said current AI model risk management guidance is outdated and the challenges to financial stability that AI may pose in the future will require new thinking on a system-wide basis.
In his speech, Gensler also warned public companies against AI washing.
"As AI disclosures by SEC registrants increase, the basics of good securities lawyering still apply," Gensler said. "Claims about prospects should have a reasonable basis, and investors should be told the basis."
He added, "Investment advisers or broker-dealers also should not mislead the public by saying they are using an AI model when they are not, nor say they that an AI model does something it's not doing. Such AI washing, whether it's by companies raising money, whether it's by broker-dealers or investment advisers may violate the (securities) laws."
