SEC mulling rules on 'transformative' AI, Gensler says

Generative artificial intelligence models offer humanity and the Securities and Exchange Commission a slew of benefits, but they also pose potential risks to the financial sector, such as conflicts of interest, so the agency is working on rules to protect investors, Chairman Gary Gensler said Monday.

Generative AI is the "most transformative technology of our time," on par with the internet and the mass production of automobiles, Mr. Gensler said in a speech before the National Press Club in Washington. The technology opens up tremendous opportunities, from health care to science to finance, but also presents challenges for the nation's top securities regulator, Mr. Gensler added.

Currently, AI models' decisions and outcomes often are unexplainable and may make it more difficult to ensure for fairness in the finance world, he said. "The outcomes of its predictive algorithms may be based on data reflecting historical biases as well as latent features that may inadvertently be proxies for protected characteristics," Mr. Gensler said. "Further, the challenges of explainability may mask underlying systemic racism and bias right in the predictive data analytics."

For investment advisers and broker-dealers that incorporate AI into their services, "The advice and recommendations they offer — whether or not based on AI — must be in the best interests of the clients and retail customer and not place their interests ahead of investors' interests," Mr. Gensler said.

He added that "conflicts may arise to the extent that advisers or brokers are optimizing placing their interests ahead of their investors' interests. And that's why I've asked SEC staff to make recommendations for rule proposals … for us to consider regarding how best to address such potential conflicts."

The SEC's latest regulatory agenda notes that agency staff is considering recommending rules "related to broker-dealer conflicts in the use of predictive data analytics, artificial intelligence, machine learning and similar technologies in connection with certain investor interactions." The proposal could be unveiled this year.

In April, the SEC's Investor Advisory Committee published its thoughts on an ethical AI framework for investment advisers. The committee said the SEC should develop further guidance for advisers on the use of AI and encouraged the agency to tackle considerations such as equity, consistent and persistent testing, and governance and oversight.

The SEC is technology neutral and focused on outcomes, rather than a given tool, such as AI or calculus, Mr. Gensler said. However, he added, securities laws "may be implicated depending upon how AI technology is used."

Mr. Gensler said AI could also be a big help for the SEC. Staff could benefit from making greater use of AI in their market surveillance, disclosure review, exams, enforcement and economic analysis, Mr. Gensler added.

But the agency needs more resources for technology. "We do have capable technologists, but this is like a step function, a real change in the underlying technology," Mr. Gensler said.

Mr. Gensler is set to testify Wednesday before the Senate Appropriations Committee to discuss the SEC's fiscal year 2024 budget.