SEC’s Gensler Issue Stark Warning on Financial Stability Risk

The U.S. Security and Exchange Commission is not going to stand by as artificial intelligence is unleashed into the nation’s finance sector – especially when it’s unleashed on everyday Americans.

“We at the SEC are technology neutral,” SEC Chair Gary Gensler said in a July 17 speech to the National Press Club in Washington, D.C.  “Just like with the treatment of calculus — we focus on the outcomes, rather than the tool itself. Securities laws, though, may be implicated depending upon how AI technology is used.”

The SEC chief says the agency won’t be hesitant to get in front of consumer finance and investing related issues tied to AI’s use by banks, brokerages, credit card companies, and other financial services providers.

“On a daily basis already, we receive messages from AI recommender systems that are considering how we might as individuals respond to their prompts,” Gensler told the Press Club. “Models have been developed to assist in making decisions about who gets jobs, loans, credit, entry to schools, and healthcare, to name a few.”

“This raises a host of issues that are not necessarily new to AI but are accentuated by it,” Gensler added.

The SEC will also take a sharp focus on how money management firms are deploying AI to attract and offer investment advice to customers.

“When used in the services offered by advisers and brokers, AI could put their interests ahead of those of investors — a move that would violate the rules that they must put the best interests of clients and retail customers first, Gensler noted. “That’s why I’ve asked SEC staff to make recommendations for rule proposals for the Commission’s consideration regarding how best to address such potential conflicts across the range of investor interactions.”

A Step Ahead

At first glance, it looks like the major investment companies are a sizeable step ahead of SEC regulatory overview on AI practices.

JP Morgan Chase, for example, is already using artificial intelligence to create an OpenAI-like software platform to select custom-designed investments for customers.

“AI has already added significant value to our company,” CEO Jamie Dimon said in a recent letter to company shareholders. “For example, in the last few years, AI has helped us to significantly decrease risk in our retail business (by reducing fraud and illicit activity) and improve trading optimization and portfolio construction (by providing optimal execution strategies, automating forecasting and analytics, and improving client intelligence).”

Morgan Stanley isn’t far behind, partnering with OpenAI to give its money managers access to the company’s massive research library. There, they can leverage data to improve client portfolio strategies – data those advisors can access in milliseconds.

“We aim to leverage OpenAI’s breakthrough technology into a competitive advantage in how our financial advisors can harness Morgan Stanley’s knowledge and insights in ways that were once never thought feasible,” notes Andy Saperstein, co-president and head of Morgan Stanley Wealth Management. “(AI) technology is a game changer in synthesizing our expansive intellectual capital, bringing the value and richness of it to a whole new level, and in the process freeing up valuable time for financial advisors to do what they do best: serve their clients.”

Prudent But Proactive

Going forward, the SEC will aim to be prudent but proactive in monitoring how financial advisory firms will be using AI applications and how those uses impact clients.

Banks, credit card, insurance and other financial services can expect the same due diligence.

“As advisers and brokers incorporate these technologies in 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,” Gensler said.

“Make no mistake, though, under securities laws, fraud is fraud,” he added. “The SEC is focused on identifying and prosecuting any form of fraud that might threaten investors, capital formation or the markets more broadly.”

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