SEC Chair, Gary Gensler, Discusses AI
SEC Releases
Introduction
SEC Chair, Gary Gensler, recently spoke at a Yale Law School event about Artificial Intelligence (“AI”) and the important role that regulators play. He discussed in depth the benefits and the risks that AI brings to the financial industry.
With recent rule proposals and news related to the use of AI and other predictive models, there are helpful takeaways below from Gensler’s speech.
4 Key Takeaways
- Gensler understands AI is here to stay.
- AI plays a significant role in our society already, be it with text prediction, language processing, medicine, and robotics.
- Popular culture has already accepted and adopted AI with expectations that it is used by most service providers.
- AI creates challenges that need to be addressed.
- Decisions and outcomes by AI can be confusing and difficult to explain.
- Biases in the underlying programming of algorithms will greatly affect the outputs.
- There is no way to guarantee the accuracy of predictive models.
- Systemic risks to the financial industry may be substantial.
- Certain types of technology can be dominated by one or two major players within an industry.
- Although network interconnectedness can increase efficiencies, it can also lead to large systemic risks.
- New thinking will be required to promote proper risk management that reduces the risk of AI being the cause of a future financial crisis.
- Firms will always be accountable for the behavior of their programs, and potential risky behavior is already on their radar.
- AI washing, fraudulently advertising AI or failing to disclosure material information about AI use, could be treated as fraud in a similar manner as ESG.
- Reasonable guardrails will be expected to supervise the use of these programs.
- Investment recommendations by AI must be evaluated for “hallucinations” or inaccurate information.
- Conflicts of interest can arise when AI is able to create profiles on investors, and make investment recommendations that may feel suitable or hand-picked for the investor, but the recommendations could actually be for the benefit of the Firm.
Vigilant’s Conclusion
As Firms continue to use cutting edge technology to maintain a competitive edge, it is vital that their compliance departments are prepared for the potential liability that can result from AI use.
As this is relatively uncharted territory, it is important that experienced compliance professionals help guide your compliance department in making decisions that are prudent.
If you have any concerns about your Firms use of AI technology, reach out to us today.